Posted on 04/28/2010 6:36:31 AM PDT by Kaslin
Dear Carrie: In 2009, I gave my son $15,000 as a gift from my IRA. I declared it as income. Is it correct that, if I had declared it as a gift, it would have been tax deductible? If so, can I claim it for 2010? Thank you so much for your answer. -- Elizabeth
Dear Elizabeth: Wouldn't it be great if the IRS rewarded us for our generosity? Unfortunately, the possible tax deduction that you allude to doesn't exist. IRA distributions are considered part of your adjusted gross income (AGI) no matter what you do with the money. As a result, they are subject to income tax.
The only exception was an IRA Charitable Rollover, available from 2006-2009, which allowed a non-taxable distribution directly to a qualified charity as defined by the IRS. Regrettably, gifts to individuals don't qualify. So the $15,000 gift to your son from your IRA isn't tax deductible from an income tax perspective. And you did the right thing in declaring the money you took from your IRA as income. (One bright spot: Gifts aren't considered income to the recipient, so your son doesn't have to pay income tax on it.)
What you might be thinking of is the gift tax exclusion, which continues to be confusing for a lot of folks.
WHAT YOU CAN GIVE TAX-FREE
Fortunately for people like you who want -- and can afford -- to be generous, you can give a considerable amount of money away in your lifetime without paying gift taxes. That seems like it should be simple enough. But the confusion comes with the amounts that can be given and what is called the lifetime exemption. Let me break it down.
-- Currently, an individual can gift up to $13,000 a year to anyone -- and any number of people -- without incurring gift taxes. So for example, if your son is married and has a child, you could give him, his wife and his child each $13,000 in any one year and not have to declare it on your tax return.
-- A married couple splitting gifts can give up to $26,000 a year to any number of individuals and still pay no gift tax.
But what happens if, as in your case, you give more than the annual limit to one individual? That's where the lifetime exemption comes into play.
WHAT THE LIFETIME EXEMPTION MEANS
The lifetime exemption basically allows you to gift a total of $1 million in the course of your lifetime above and beyond the annual limit before having to pay gift taxes.
Annual limits can change year to year, but right now if you give an amount greater than $13,000 ($26,000 for a couple) to any one individual in a given year, while it doesn't trigger a gift tax, you still have to file a gift tax return. This extra amount will then count toward your lifetime exemption. It's only after you exceed $1 million that you have to be concerned about actually paying gift taxes.
So in your case, in 2009 when you gave your son $15,000 from your IRA, while you correctly declared this as income, you also needed to file a gift tax return (IRS Form 709) by April 15, 2010, to declare the excess $2,000. If you split this gift with a spouse, you would still need to file a gift tax return, but you would be under the individual annual exclusion limit. It's probably wise to talk to your tax adviser to see if and how you should correct this oversight.
THE VALUE OF FUTURE GIFTS
While this information may help you with the technical aspects of future gifts, whether from your IRA or other assets, I always think that giving money to our kids is a great opportunity to provide an educational as well as an economic boost. For instance, what did your son do with the money? Pay off debts? Make a down payment on a house? Contribute to his retirement? Any transfer of funds from parent to child (no matter how young or old!) can open the door to fruitful discussions about the importance of budgeting, getting a handle on debt and saving for retirement.
I'm a big believer in one generation helping the next. But I'm also a big believer in sharing knowledge as well as wealth. Talk to your son about how you saved for retirement in your IRA and how that saving allowed you to help him. Doing so may increase the long-term value of your gift -- and give you the personal reward of knowing you're helping your son plan for a more secure financial future. That can more than make up for the lack of a tax deduction.
Early withdrawal of IRA’s will soon be taxed 20% under ObamaCare I heard.
Plus there is a 50% gift tax, I don’t know if that applies to a $15K gift or not though. You might want to check with someone who would know.
I don’t understand why it is any of the government’s business what I do with my after tax money. If I give money to my son, why should he pay tax on it if I already have? Screw the IRS.
If I understand correctly, the gift tax (something like 50% when it gets to big gifts) is on the giver.
That is why lotto winners must get a contract document that states everyone who will get a % of the winnings before they go and collect the winnings.
Every year on April 15th you have to justify why you should keep as much as you do. In the Government's eyes there is no such thing as after tax money, just money they haven't gotten a hold of yet.
“””I don’t understand why it is any of the government’s business what I do with my after tax money. If I give money to my son, why should he pay tax on it if I already have? Screw the IRS.”””
Oh but it is the government’s business. The government wants to tax your estate when you die. If the government allowed you to give away your estate to your son before you died, then the government would not be able to tax your estate.
Isn’t more government wonderful!!!! (sarc)
Be sure use this tax planning tip to minimize your taxes!
One problem is the Congress has shown that it loves retroactive taxes, so even if you schedule your death for 2010 for tax purposes, Congress may retroactively change the law to do some grave robbing this year.
For 2009 and 2010 the gift tax exclusion is $13,000. One person can give $13,000 to another gift tax free. A mother and father could give $13,000 each, for a total of $26,000 and so on.
Highest gift tax rate is 45% for amounts exceeding that.
Example: 100 of my closest friends each gift me $10,000 for a total of gift of 1,000,000 as their only gift for the year. They pay no gift tax as the amount is under the limit. Do I have to pay?
I think the answer is the amount equal to the current year’s gift limit ($13,000 for 2010, I think), is tax free and the remaining is counted as income and fully taxed.
Thoughts?
Hey, you pay your money and you take your chances. You might get lucky and Congress won't get around to making the death tax retroactive. We're already four months into the year. I thought surely Congress would change the law before 2010 started. And you know that there is some multi-million-dollar estate out there that will litigate if Congress tries to make it retroactive to 01/01/10.
We should contact the zero-population-growth people and get them going on this. Since taxing something makes it rarer, the higher the death tax rate is the harder people are going to try to extend their lives in order to avoid paying taxes. Therefore the death tax is anti-ZPG. /humor
I’ll give my money to whoever I wish and for whatever amount I wish. I have NO intention to ever tell Big Brother what I do with my after tax money. PERIOD.
Only saying what the tax code is.
I understand.
I’m just saying I don’t care what they say.
Imagine (only in our dreams) if we just paid a flat per cent of our income in federal taxes... no bizarre deduction regulations; no loopholes; no need for H&R Block, computer programs or CPAs; just file your taxes with a postcard. Better still abolish withholding and make tax due day November 1st. Perhaps if taxpayers had to write a check for their taxes shortly before every election they might make better choices at the ballot box.
45% is still darn high
45% isn’t where the schedule starts, I think it starts at 38%. Not saying that isn’t high either.
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