[Disclaimer: I’m not sure I should be posting this since it might be bordering on the seeking of professional advice; but I’ll proceed with the notion that if I sufficiently limit my question to generalities, then it might be acceptable. If I err, I ask the moderators to accept my apologies and take whatever action deemed appropriate.]
Anyway, here’s the situation. My parents are in the process of selling their house, and have stated their intention of immediately giving, once the deal goes through, a part of the proceeds to my brother and me. My question is, is this a good idea? My supplemental tax rate–the rate at which my bonuses have been withheld–is fairly high so I’m assuming the same would apply if a parent gives money to a son. If so, can any financially savvy Dopers tell me, in very general terms, what I can do with such a gift to minimize taxes? For example, could I roll the whole thing into an IRA? The amount could be substantial, perhaps 1X my annual salary.
Anything to point me in the right direction would be appreciated.
If you don’t need the money right away, then have them give you the total over a number of years. Each of them can give you a gift thereby doubling the amount allowed by the tax law.
Just for openers, any gift made to you is not taxable as income to you. If I gave you $100,000 (yeah, right!), you would not have to report it as income. Take a good long look at the 1040 form. There’s no place to report a gift as income, and that’s no accident.
Your parents, on the other hand, will be liable to pay a gift tax on any amount more than $11,000 given to one person in one calendar year. So, the short answer is that they should dole out the proceeds to you and your brother in $11,000 chunks, one chunk to each of you each year. The publication from the IRS that explains all of this is Publication 950, and the form they’d have to fill out is Form 709.
None of this has any effect whatsoever on capital gains. If your parents reallize a capital gain on the sale of the house, they’ll have to report it on their own tax return (on a Form 2119, assuming the capital gain is more than the current limit, which is $500,000 for a couple, as long as they’re filing a joint return, it was their main house, they lived in it for 2 out of the last 5 years, and so on - see Publication 523 for all the gory details), whether they give you the proceeds or not.
To clarify just a bit, the gift tax exclusion applies to each parent and to each donee. Each parent can give 11,000 to you and your brother for a total of 44,000 each year. And if you and your brother have families they can also give 11,000 to each spouse and child each year.
Absolutely correct. I always forget about that - the limit is $11,000 per year per donor/donee combination, so you can get up to some pretty large numbers by mixing and matching!
Of course, each of Spectre’s parents could give you and me $11,000 each per year. We’d be appropriately appreciative, wouldn’t we?!
ISTR that the annual gift exemption limit was recently indexed for inflation – a change that was long overdue.
The capital gains question in the title hasn’t been addressed yet, so I’ll swing at it. In general, a sale of a primary residence does not involve a taxable gain. There is an exclusion for buying a new and more expensive primary residence, and there is a one-time exclusion of (IIRC) $500,000 under certain conditions. Were the parents to give a share of the proceeds, there would be no capital gain on the cash; were the parents to give a share of the house ownership before the sale, the various shares may or may not have taxable gains. At that point you need professional situation-specific advice.
Is this a situation involving gifts to children under 18, invoking UGMA/UTMA rules? Or is everybody involved 18 or older?
Oh, yes – when in doubt, check irs.gov for the publication on gift, estate, and transfer tax rules.
If the “Inheritance Tax” get the shit-can (I’m keeping my fingers crossed) for good, any funds not already distributed will be yours tax-free as well when your parents eventually depart this veil of tears. Its abolition will simplify estate planning somewhat.
Thought I’d throw that in since everyone beat me to the better answers.
“But I’ll always regret that Rwandan thing.”-- Bill Clinton
