Hello, My spouse and her brother inherited money from the sale of her mother's house. After probate, half of the money was deposited into our checking account via wire transfer. We paid off our mortgage and divided the remaining amount with our son (he received $70k). Does he need to pay tax on that money? Thank you!
-Gary, SC
Dear Gary,
“Do I have to pay tax on this cash?” It is the million-dollar question that is on the mind of anyone who is gifted money. (For that matter, it is probably the #1 burning quandary on everyone’s mind when they receive cash.) I will not prolong the angst of anticipation and tell you right from the start that your son does not need to report or pay tax on the $70,000 you gifted him from the inheritance your wife received from her mother’s probate! Generally, when a person is gifted money, whether in the form of a check, automatic transfer, or cold hard cash, the jubilant recipient will not be required to report or pay taxes on their newly acquired bounty.
Now, suppose the gift recipient (known in the tax world as the “donee”) takes the cash and invests it in stock, crypto, a new car, rare coins, or a nifty Pudgy Penguin NFT and later sells their investment. In that case, the disposition of the asset obtained with the gifted cash may be taxable.
Here’s the interesting thing about gifts: it’s not the recipient that needs to be mindful of gift taxes but the donor who might have a tax obligation. No, your eyes are not deceiving you. Depending on the fair market value of all the gifts given to an individual during the year, the donor may have to file IRS Form 709, United State Gift (and Generation-Skipping Transfer) Tax Return. Although your son does not have to report to the IRS or pay tax on the generous gift you and your wife gave him, the two of you have a gift return reporting requirement. Depending on the amount of past taxable gifts you have given, you might owe tax, although, for most folks, this is unlikely.
Generally, a gift tax return is not required for federal tax purposes as long as a donor does not gift any one person over the annual gift tax exclusion amount during the year. For 2022, the annual gift exclusion amount is $16,000. For 2018 through 2021, the annual gift exclusion amount was $15,000. Here is an example.
Joe was always close to his Aunt Maude and cared for her during her golden years. When Aunt Maude passed away peacefully at age 99, her trust stated that her nephew Joe was to inherit one million dollars in cash. Joe had no idea that he was going to inherit such a windfall. After he paid off his mortgage and car loan and paid for a cruise around the world, Joe wanted to share his good fortune with his three best mates. So, to ring in the New Year in style, Joe gifted Wally, Fred, and Lawrence $15,000 each just before midnight on December 31, 2021. Even though the total amount of gifts Joe gave that year was over $45,000 (Joe gave family members nominal birthday and Christmas gifts during the year), Joe had not given his three friends any other gifts of cash or property in 2021.
Furthermore, none of his family members received cash and other property over $15,000 from Joe. Therefore, Joe was not required to file Form 709 for 2021. Had Joe given his friends any other gifts throughout the year (for example, gifting Fred a ticket worth $125 to the summer Blue Grass Festival), Joe would have been required to file Form 709 for 2021 since he gave gifts that were worth more than the 2021 annual exclusion amount ($15,000).
Because you gifted your son at least $70,000 during the year, which exceeds the 2022 annual gift exclusion amount of $16,000 (I am assuming you gifted the money to your son in the current year), you and your spouse are required to file Form 709. Based on the wording of your question, I am assuming the $70,000 was a gift from both you and your wife. If both of you gifted the money to your son, each of you would file a Form 709. Even if only one of you made the gift, you could elect to split the gift between the two of you. To elect to split the gift between you and your wife for tax purposes, your wife would need to agree. A tax advantage exists when spouses elect to split a gift for tax purposes. Each spouse can deduct the annual gift exclusion amount from the taxable portion of the gift. As an example, let’s take a look at your tax situation. For this example, I will assume that the only gift you gave your son during the year was $70,000.
If you and your wife elect to split the $70,000 gift you gave to your son, each of you will report gifting $35,000 to your son. When taking into consideration the $16,000 exclusion for 2022, each of you will report a taxable gift amount of $19,000 ($35,000 (1/2 of total gift) - $16,000 (annual gift exclusion for 2022) = $19,000 (taxable amount of the gift)). If it turned out your wife gifted the $70,000 and you choose to not split the gift, your wife would report a taxable gift of $54,000 ($70,000 (total gift given) - $16,000 (annual gift exclusion for 2022) = $54,000 (taxable amount of the gift)).
You might be thinking,
Okay, but what’s the damage? How much tax do my wife and I have to pay? Hopefully, I have some good news for you. Although you have a filing requirement, you may not pay any tax when you file the return. In addition to an annual gift exclusion, taxpayers have a
lifetime gift exclusion. The lifetime gift exclusion changes from year to year. For 2022, the exclusion for lifetime gifts is $12.06 million, which equates to a lifetime tax credit of $4,625,800. Until you or your wife make taxable gifts of over $12,060,000, you will not pay gift tax. Every time you make a taxable gift, your lifetime gift credit amount reduces by the tax incurred.
Just like taxpayers are allowed to make a set amount of gifts throughout their lifetime and not pay tax on these gifts, taxpayers may exclude a certain portion of their estate from federal estate taxes when they die. This amount is known as the
estate tax exclusion. One thing to be aware of is your lifetime gift tax exclusion and lifetime estate tax exclusion are one and the same. This means that each person has a combined lifetime gift and estate tax exclusion, which for 2022 is $12.06 million. So, if someone makes lifetime taxable gifts of over $12.06 million during their lifetime and passes away in 2022, they will not have any exclusion credit left over for any estate taxes that might be due. Congress tied the lifetime estate and estate exclusions together to keep taxpayers from making deathbed gifts, thereby having their fortunes escape estate tax.
Some gifts do not count toward the annual gift tax exclusion amount. Tuition payments
made directly to a qualified domestic or foreign educational institution (like a college or university) do not count towards the annual gift exclusion amount. Giving the money to the student who then takes the money to pay for tuition is not considered an excluded gift for gift tax purposes. The donor must be the one to pay directly for the school’s tuition. Payments towards room and board, books, supplies, or other expenses count towards the annual gift tax exclusion amount and are subject to gift tax. In addition to tuition payments, payments made directly to a medical care provider for medical services rendered are not subject to gift tax and are not applied to the annual gift tax exclusion amount. Here is an example.
In 2021, Lana and her sister Martha played soccer in an adult community league. During the game between their cross-town rivals, the Jackson Plumbing Roto Routers, Martha collided with one of the Router’s right fullbacks and broke her ankle. Referee flags flew, and Martha received a personal foul for tripping, adding insult to injury. Furthermore, Martha had no medical insurance. Not wanting to kick a gal when she’s down, Lana paid Martha’s emergency room bill, totaling $3,500, before taking her home to recuperate. The $3,500 Lana paid the hospital for Martha’s broken ankle will not count towards the $15,000 annual gift exclusion amount Lana has to spend on Martha for 2021 before being required to file Form 709.
More information about the federal gift tax can be found on the IRS website, including a
webpage of the most frequently asked questions taxpayers have on gift taxes. You mention you are from the state of South Carolina. Currently, South Carolina does not have an estate or gift tax - hooray! Even if Congress imposed a gift tax, we can all be thankful that a price tag cannot be placed on the best gifts in this world - a kind word, a helping hand, compassion, and the love of family and friends.
Wishing you the greatest of this world’s gifts and many happy returns,
Jean Lee Scherkey, EA