Are monetary gifts taxable

Dear Len & Rosie,

Early this year, I gave my niece $19,000 to help her buy a car. She called me the other day and said she was told she has to pay income tax on this money. She also asked me for money to pay the tax. Is this true? Should I give her more money? Will she have to pay tax on that too?

David

Dear David,

Either your niece is uninformed, or she is fishing for more money from the Bank of Uncle David. She doesn’t have to pay income tax on a gift or even an inheritance unless it’s tax-deferred money, such as the accrued interest in a US Savings Bond, or a tax-deferred retirement account inherited upon your death. However, in theory you could have to pay federal Gift Tax for having made the gift.

The Gift Tax and the Federal Estate Tax are related. In fact they are the same tax, called the Federal Gift & Estate Tax. This is a tax on both gifts you make during your lifetime and on what you own upon your death. The good news is that you, and most people, do not have to be concerned about Gift & Estate Tax for two reasons.

First, there’s an annual Gift Tax Exclusion in the amount of $16,000 for 2022 (up from $15,000 in 2021). This exemption allows to give away $16,000 to as many people as you want, each and every year, and neither you nor they will have to report the gift to the IRS. You could stand at the entrance to town and pass out $16,000 checks to everyone who enters. This would be entirely tax free, and would also boost tourism.

Because you gave your niece $19,000, you have exceeded the limit. This means you owe Gift Tax on $3,000. Fortunately you do not have to write a check to the IRS. Your gift tax liability will be “paid” by your Federal Gift & Estate Tax Unified Credit, which covers the Gift & Estate Tax on the first $12,060,000 you gift above the $16,000 annual Gift Tax exemption or own upon your death.

You are supposed to report this gift on IRS Form 709, attached to your Federal Income Tax Return. Then, your Unified Credit exemption will drop by $3,000 to only $12,057,000. Unless you are wealthier than that, relax and don’t worry about it.

Len & Rosie

A farewell & final column from our dear friend Len Tillem

Dear Readers:

Len Tillem passed away on Thursday, January 13, 2022 at the age of 77. A few of his columns were still in the pipeline. Here’s is the first of them.

Dear Len & Rosie,

After my father’s recent death I went in to roll over his IRA, and was told that I couldn’t do it and that I’d have to cash it in over 10 years. I thought I could take out only annual minimum distributions for the rest of my life. This is going to cost me a lot of money. Are they wrong?

Steven

Dear Steven,

If it were still 2019, the IRA custodian would be flat out wrong about the 10-year limit in which you have to cash out an inherited IRA, and you would be able to cash in your father’s IRA over your own life expectancy (life expectancy tables can be found in IRS Publication 590-B).

However, since your father died after 2019, you have to follow the new rules, which were created by the ironically named SECURE Act. Instead of being able to make distributions from an Inherited IRA over the rest of your lifespan, you have to do it within only 10 years of your father’s death.

On the other hand, there are no required minimum distributions that you have to take. You could, if you really wanted to, leave the IRA alone and cash it in all at once 10 years from your father’s death. Unfortunately, since distributions from most IRAs are taxable, you could get another 10 years of tax-deferred growth at the cost of a massive tax bill at the end. Maybe the best thing to do is to take out one-tenth the first year, one-ninth the second year, and so on, so as to spread out the tax liability over ten years.

There are some exceptions. For a minor beneficiary, the 10 year withdrawal period starts only on the person’s 18th birthday, allowing tax-deferred growth until age 28. Also, a beneficiary less than 10 years younger than the decedent, a spouse, or a disabled beneficiary may still cash in the account over his or her life expectancy.

Len & Rosie