gifting money and taxes question

[KTP]

So I think you can gift up to 12,000 to a relative without you having to pay a gift tax (or the receiver having to pay any tax). Is this true?

If so, what is to stop a couple from gifting $24000 in a year to one of their parents, having said parent invest the money in an investment, then gifting back the profits and principal over the next 2 or 3 years? If the children are in a 38% tax bracket and the parents pay little or no taxes, then there would be a net tax advantage here.

This was just a thought I had while in the shower..but there has to be something not legal about this.

[sandrark]

When you gift money to people, you are still paying taxes on that income BEFORE you gift it - it's not a charitable deduction.

So yes, you can gift someone $16K per year with no ADDITIONAL gift taxes due (but the income taxes have already been paid). So you are not shielding your income from the 38% tax.

Sandi

[KTP]

No, you missed my point.

I meant would gifting money to your parents allow the money to grow in a sort of tax shelter (if your parents are in a much lower tax bracket).

Example.

My wife and I gift our parents $24,000

We direct them to invest it in something that yields a 7% taxable gain (maybe a corporate bond or something).

They pay the tax on that $1680 in their 15% bracket (tax of $252). They then gift us back $1428 tax free.

If we had earned the 7% directly in our 38% tax bracket, we would only have $1042 after paying $638 in taxes.

So we gained almost $400 by doing this.

This really seems like it could not be legal...

[MonkeyMama]

It's legal.

The amount is currently $13k per year. Pretty much, up to $13k per person, you can do whatever you want with it.

It's a gift so you would have to trust the other person - no legal recourse to get the gift back. That's why most people would never do this, and why it's not a popular tax shelter.

Using minor children for this method is/was popular and gave rise to kiddie tax rules. Thing is, in those cases the parents can generally retain control over the money. It's not quite the same as handing it over to another adult who can do whatever they want with it.

[disneysteve]

So really you and your wife could gift your parents $52,000 since each of you can give each of your parents $13,000.

Just make sure that the added income wouldn't bump them into a higher tax bracket (though it still wouldn't be 38%).

[Like2Plan]

So really you and your wife could gift your parents $52,000 since each of you can give each of your parents $13,000.

Just make sure that the added income wouldn't bump them into a higher tax bracket (though it still wouldn't be 38%).

That is the beauty of a gift. Parents wouldn't owe income taxes on the gift, they would just owe taxes on the gains.

(of course, as a gift your parents could decide to give the
money to a sib who is struggling or a favorite charity or the money could
end up as part of your parents estate... )

[KTP]

Hmmm this has me thinking of other interesting things.

My parents do not have Roth IRA accounts. We could gift them the money to contribute to the Roth IRA and they could leave us the Roth IRA in their will (they live off of a nice pension + SS x 2, so never needed any type of IRA). This would have 0 tax consequence for them and would allow us to have a sort of Roth IRA since we are not eligible ourselves (although my wife is going to do that rollover trick in 2010 for a small one).

Pretty cool! My parents estate is going to be miniscule, so no worry about reaching the 2 million cap on no taxes. You do have to take distributions from the Roth by the 6th year after the orginal owner's death, but there is no penalty.

Am I seeing something absolutely brilliant here? We would need to make sure they modify the will to leave the Roth IRAs to us, as I do have a brother and sister. This would work much better if you were an only child...

[sandrark]

You can't do that in re: Roth IRA for the parents.

IRAs must be funded with EARNED income - so if your parents only have SS and a pension, they have no earned income for them to contribute.

Sorry!

Sandi

[disneysteve]

You can't do that in re: Roth IRA for the parents.

IRAs must be funded with EARNED income - so if your parents only have SS and a pension, they have no earned income for them to contribute.

This would only work if the parents have earned income but can't afford to tie it up in a Roth, which is a possibility.

They don't need to change their will to leave a Roth to you. They just need to make you the beneficiary of the Roth. Of course, they might have to change the will to even things out otherwise if they do that.

[KTP]

It was mostly just a thought experiment. I don't think I would actually ask my parents to set up something like this, even if they do have some earned income. It seems kind of creepy.

Also, there could possibly be some scenario where a creditor or somone could make a claim on the Roth as an asset if their estate doesn't cover debts due to some medical emergency expense in the future.