By Ellen Phillips, Commentary
Q: My wife and I would like to “gift” our daughter and her new husband with enough money to help them build a new home this year. I know we’ll have to pay some tax on the amount but we’re not sure if we can afford these taxes. What do you advise? — Lawrence Limits
Dear Mr. Limits: First, please note that, by no means, am I a financial adviser; however, I can answer this somewhat simple tax question, simply by visiting www.smartmoney.com or www.irs.gov. You and your wife each can give a maximum of $12,000 to your daughter and son-in-law each. This total amount on which you do NOT pay taxes is $48K; while not enough to build a new home, it’s certainly a nice sum to help with the down payment. Of course, the amount you bestow could go higher if you and Mrs. Limits also gift your underage grandchildren with that specific amount. Even better, you don’t have to pay gift taxes, and the $1 million-dollar tax exemption for your estate remains in one piece.
On the other hand, if either you or your wife hand over a penny more than the $12K to a single gift recipient, then you potentially face trouble that might haunt you for years to come if you don’t file Form 709, due at the same time as your 1040. If your cumulative taxable gifts surpass the above exemption, then you’re safe — you won’t owe any federal gift tax.
Along this same line, don’t think the IRS necessarily will agree with you if you sell an item to your child(ren) that you claim is less than Uncle Sam believes it to be. For instance, your cabin in the Smokies might be appraised in today’s market at $275,000, and you sell it to your son this spring for that amount. Yet, when you’re dead and gone, the Feds could audit your estate’s tax return and claim that the cabin was actually worth $325K, making it appear that you exceeded the yearly $12K tax-free amount. Guess what? Your kid now owes $50K extra to the IRS! Don’t take the risk: file a Form 709 for the tax year that the transaction takes place, which gives the IRS only three years to challenge a value. After this time period passes, the former can’t just pop up again with a claim. Just be certain that your assessment is close to or on the dot for the cabin/item’s price before the sale. Finally, please do contact either an accountant or an attorney if you plan to give more than $12K to any one heir.
2008 IRS Tax Tip: Whoever prepares your taxes, be sure that he or she is the actual preparer. Sometimes, a CPA or a tax attorney that practices in a larger firm or even a very busy one-person company might delegate your tax return to a subordinate, such as a person training to become an accountant, for example. Ask upfront who will actually perform the work and his or her accessibility. If you’re OK with someone other than the person you thought would be “The One,” at least insist that the latter carefully review your return before it’s delivered back to you to sign and mail C/O of Uncle Sam.
Editor’s Note: Ellen Phillips is a retired English teacher who has written two consumer-oriented books. Her Consumer Watch column appears on Saturdays in the Business section of the paper. An expanded version is at www.timesfreepress.com under Local Business. E-mail her at consumerwatch@timesfreepress.com
