Gifting to children

[SecondCor521]

Hi all.

I know about the annual gift tax exclusion amount and how that works.

I've read the definition on the IRS site about what constitutes a gift.

I have questions.

Suppose I take my kid out to lunch or dinner and pay the check. Technically it would appear that the $20 for his hamburger and fries would count towards the $15K exemption. I'm betting nobody bothers with that level of accounting / transparency / fidelity to IRS statute.

Suppose I take my kid on a vacation and pay for flights and hotels. Same story here I bet. Nobody (or nearly nobody) is tracking that.

What if I take all three of my kids on a Caribbean cruise, and that's like $9K attributable to their cabins / food / flights / port taxes, etc. Does any taxpayer you know keep track of that?

Over a period of a decade or two, the difference between gifting $15K via check to three kids vs. gifting a $15K check to three kids *and* taking them on a cruise or two per year adds up to a lot of money.

Questions:

1. Is my understanding correct that "in kind" gifts to kids would count towards the $15K annual gift tax exemption amount?
2. At what level do you or people you know keep track of this sort of stuff? Do you only gift $14,980 plus a hamburger? $12,000 plus a cruise?

 

[Gill]

Your points are all well taken. Technically everything you describe is a gift and in any given year should be totaled and reported if exceeding $15,000 per donee.


In my opinion, the gift tax currently doesn't make an awful lot of sense except as a way to catch lifetime transfers by people with estates exceeding the lifetime exemption of $11 million+. For all others it makes little sense because most of us will never be taxed on gifts or will our estates be subject to tax.


When I first entered the field of trusts and estates, the annual exclusion was $3,000 and the lifetime exemption for gifts was $30,000. The estate tax exemption was $60,000 and the marital deduction was limited to 1/2 the adjusted gross estate. My father died in 1976 with an estate of about $150,000 and there was an estate tax of about $1,000. At that time the gift tax made sense as a way to catch lifetime transfers evading the estate tax. Now it has become a nuisance for most people and, as you point out, it's quite likely that most transfers in kind are never reported and I don't think the IRS spends much time worrying about it.
Gill

 

[PatrickA5]

I filed one gift tax return about 10 years ago when I funded a 529 account with $100K. Since then I haven't bothered. There might have been a couple of times it was technically required (helped a kid with house down payment), but I'm not sure I see the point. I'll never come anywhere close to the estate tax amount. I doubt the IRS cares.

 

[Souschef]

I recently filed a 709 because I gave one son the down payment for a home.

 

[Golden sunsets]

We've always made sure that our cash gifts are under the gift allowance threshold, but I've always wondered how the IRS would ever track gifts in excess of the threshold. Example: We plan to gift our single daughter $50,000 to help fund a first home downpayment. We'll gift $25,000 this year and $25,000 next year in order to stay within the tax rules, but would the IRS ever find the infraction if we gifted all $50,000 in 2021, or all in 2022?

 

[kgtest]

Hi all.
...
Suppose I take my kid out to lunch or dinner and pay the check. Technically it would appear that the $20 for his hamburger and fries would count towards the $15K exemption. I'm betting nobody bothers with that level of accounting / transparency / fidelity to IRS statute.

$hit, I wish my ol man would pay for my lunch. Seems its always the other way around for me. And paying for a vacation...forgedduboutit Although, I think I had a dream about it once...

He is insistent that he will put now just his 2 remaining children out to dry with Uncle Sam once he is finally gone. I've explained many times the benefits of gifting to us over a period of time, rather than a lump sum upon death etc. And now with the 10 year inherited IRA drawdown period...there will be a decade where Uncle Sam will be jumping for joy.

It's fine though, even without his gifts I still love him all the same and will continue to help him build up that tax burden for us inheritors.

 

[rodi]

I filed one gift tax return about 10 years ago when I funded a 529 account with $100K. Since then I haven't bothered. There might have been a couple of times it was technically required (helped a kid with house down payment), but I'm not sure I see the point. I'll never come anywhere close to the estate tax amount. I doubt the IRS cares.

Hmmm... Not sure you needed to do that. 529's are typically kept in the parents ownership with a designated beneficiary (kid/student). So when you fund - you still own the money. You can even withdraw it for non-qualified purposes - but pay penalty/taxes as necessary.

My reading is that tuition payments made directly to the college from the 529 or the parent are not considered gifts. But giving the kid a check made out to the kid, with the purpose of the kid then paying the tuition would be considered a gift. But if you're pulling money from a 529 - you wouldn't want to do that because you want to show it's a qualified use of the funds - and that starts to get messy if you write the check to the kid.

And gosh - I hope the IRS doesn't look at the small stuff mentioned by OP - I just sent my son an amazon order of a case of ramen for when he's hungry after the dining hall closes. I tossed in some candy, and instant coffee. I doubt I hit the gift limits, but still.

 

[cathy63]

Hmmm... Not sure you needed to do that. 529's are typically kept in the parents ownership with a designated beneficiary (kid/student). So when you fund - you still own the money. You can even withdraw it for non-qualified purposes - but pay penalty/taxes as necessary...

Strangely, the tax code explicitly defines 529 contributions as gifts to the named beneficiary, even if they are made by the account's owner.

For 529s the law also provides an option to spread the gift over up to 5 years, but you still have to file a gift tax return and check the appropriate box to elect that treatment.

 

[RobbieB]

I wouldn't worry about checks under 10 grand or anything else under that amount either.

Real estate? Yeah, everything is on record.

Technically, yeah, you should keep every tid-bit in order. In reality, nobody cares.

 

[Sunset]

We've always made sure that our cash gifts are under the gift allowance threshold, but I've always wondered how the IRS would ever track gifts in excess of the threshold. Example: We plan to gift our single daughter $50,000 to help fund a first home downpayment. We'll gift $25,000 this year and $25,000 next year in order to stay within the tax rules, but would the IRS ever find the infraction if we gifted all $50,000 in 2021, or all in 2022?

A person would think, if you gave $50K in cash... how could they tell ?

First sign would be the bank reporting the large deposit your daughter did to her account. If they asked her, she could safely claim you gave it to her over 2 yrs and she kept it in cash until the deposit.
Of course if they ask you to show the $25K from each of the years, it would be awkward.

 

[Sunset]

OP - I don't track lunch, and when I invited DD to join us in FL, I didn't break out her portion of lunch or gas money .

I haven't paid for anyone's cruise, but I guess if I did, I'd consider it a needed expense for me to take the cruise as DD could help out an old geezer like me around the ship. , so I won't mention it.

If I write DD a check of a large amount, I guess I'd track that, and report it if I go over the limit. I'm sure there are automated systems to notice that.

One time, I visited a bank machine in Canada, and withdrew a good sized amount of money. The next day I was crossing the border, and US customs for the FIRST and ONLY time asked me how much money I had on me !!
In case folks don't know if you bring more than $10K across without declaring it, they can seize it.
I always have less than $10K on me, so I won't have an issue.

But I WONDER how coincidental in all the decades of multiple trips across the border, the one time I filled my pockets literally on my way back they ask.

 

[target2019]

Gift tax applies to money or property. Leave it at that.

 

[The Cosmic Avenger]

$hit, I wish my ol man would pay for my lunch. Seems its always the other way around for me. And paying for a vacation...forgedduboutit Although, I think I had a dream about it once...

He is insistent that he will put now just his 2 remaining children out to dry with Uncle Sam once he is finally gone. I've explained many times the benefits of gifting to us over a period of time, rather than a lump sum upon death etc. And now with the 10 year inherited IRA drawdown period...there will be a decade where Uncle Sam will be jumping for joy.

It's fine though, even without his gifts I still love him all the same and will continue to help him build up that tax burden for us inheritors.

It's always something, isn't it? My dad was an accountant, and had his accounts in excellent order; the NYS household exemption covered everything that wasn't TOD/POD, and I only had to deal with two financial institutions. I did, however, have to pay someone to haul away the hoard he had accumulated, and, like you, I had asked him to try to deal with it (with my help) while he was alive rather than dump it all on us to deal with after he was gone. But he was fastidious about not wasting a penny.

Anyway, I wish I could ask him now for his thoughts on this issue, he always wanted to treat us to dinner, and sometimes bigger things.

 

[sengsational]

I wonder if that proposal to "tracking transactions over $600" would be leveraged beyond catching cash earnings and apply to gifting too. What a mess that would be. But on the topic of subtracting out the price of the burger, I believe that would fall under the paperwork reduction clause...unless it's a huge expense, I can't imagine them coming after you for it. Letter vs spirit, and all that.

 

[Car-Guy]

Hi all.

I know about the annual gift tax exclusion amount and how that works.

I've read the definition on the IRS site about what constitutes a gift.

I have questions.

Suppose I take my kid out to lunch or dinner and pay the check. Technically it would appear that the $20 for his hamburger and fries would count towards the $15K exemption. I'm betting nobody bothers with that level of accounting / transparency / fidelity to IRS statute.

Suppose I take my kid on a vacation and pay for flights and hotels. Same story here I bet. Nobody (or nearly nobody) is tracking that.

What if I take all three of my kids on a Caribbean cruise, and that's like $9K attributable to their cabins / food / flights / port taxes, etc. Does any taxpayer you know keep track of that?

Similarly, have you ever gone to a casino and won any money? Did you report your gambling winnings? I'm sure most don't but technically that's false reporting. Isn't that income tax evasion?.... The IRS knows, or can easily find out in many/most cases if you win "anything" in a casino...(even a few dollars)...

I think gifting would be harder for them to track for non cash gifting. (Vacations, dinners, or even folding cash)... Gifting cars, houses, and checks are of course much easier to "see"..Of course, honesty is the best (well safest) policy.

 

[Car-Guy]

I wonder if that proposal to "tracking transactions over $600" would be leveraged beyond catching cash earnings and apply to gifting too. What a mess that would be.

It's coming. They didn't build all these massive computer farms and plan on hiring tons more people just to track the handful of billionaires in the US.

 

[rodi]

Strangely, the tax code explicitly defines 529 contributions as gifts to the named beneficiary, even if they are made by the account's owner.

For 529s the law also provides an option to spread the gift over up to 5 years, but you still have to file a gift tax return and check the appropriate box to elect that treatment.

Thanks. More digging shows you are right.

Good thing we only contributed $6k/year/child. Well under the limit. (2 kids = $1000/month... which was about what we could afford and still save for retirement).

 

[rodi]

Coming back to the 529 question.... (Sorry for the hijack). What if a kid decides not to go to college because they found another field that fulfills their goals, but the sibling wants to do medical school/phd/etc. Under the 529 rules the owner (parent?) can change the beneficiary. Does that trigger a new gift tax threshold? How does this work since the original beneficiary isn't benefitting from the "gift"?

These 529 tax considerations are so convoluted.

 

[cathy63]

Coming back to the 529 question.... (Sorry for the hijack). What if a kid decides not to go to college because they found another field that fulfills their goals, but the sibling wants to do medical school/phd/etc. Under the 529 rules the owner (parent?) can change the beneficiary. Does that trigger a new gift tax threshold? How does this work since the original beneficiary isn't benefitting from the "gift"?

These 529 tax considerations are so convoluted.

From Section 529 of Title 26.

(B)Treatment of designation of new beneficiary
The taxes imposed by chapters 12 (gift tax) and 13 (generation skipping transfer tax) shall apply to a transfer by reason of a change in the designated beneficiary under the program (or a rollover to the account of a new beneficiary) unless the new beneficiary is—
(i)assigned to the same generation as (or a higher generation than) the old beneficiary (determined in accordance with section 2651), and
(ii)a member of the family of the old beneficiary.

Transfer to a sibling of the original beneficiary is fine, but some other types of transfers do trigger gift or gst tax. I'm guessing the most common case where that would arise would be shifting an unused 529 account from a child to a grandchild.

 

[1242Vintage]

We’ve gifted lots to our kids these last few years as they have launched. Primarily older reliable cars we no longer want/need and monies to help with moving expenses from university to new jobs.

BUT unbeknownst to me until lately, my lovely wife continues to be the recipient of monies from her 96 year old Dad.

Fortunately her “allowance” from Dad is under the exemption amount so no worries there. Never thought of the tax implications of the gift from Dad to my wife.

 

[SecondCor521]

Similarly, have you ever gone to a casino and won any money? Did you report your gambling winnings? I'm sure most don't but technically that's false reporting. Isn't that income tax evasion?.... The IRS knows, or can easily find out in many/most cases if you win "anything" in a casino...(even a few dollars)...

I think gifting would be harder for them to track for non cash gifting. (Vacations, dinners, or even folding cash)... Gifting cars, houses, and checks are of course much easier to "see"..Of course, honesty is the best (well safest) policy.

I don't gamble, so I report neither winnings nor losses. I've been a volunteer tax preparer though, and had clients who reported winnings. Most of those won enough to trigger the casino to issue a tax form (1099 maybe?), so that helps them be more honest. We always ask about any losses to deduct against winnings, as that is legal to do so.

It's coming. They didn't build all these massive computer farms and plan on hiring tons more people just to track the handful of billionaires in the US.

That is only a proposal at this point.

 

[SecondCor521]

Coming back to the 529 question.... (Sorry for the hijack). What if a kid decides not to go to college because they found another field that fulfills their goals, but the sibling wants to do medical school/phd/etc. Under the 529 rules the owner (parent?) can change the beneficiary. Does that trigger a new gift tax threshold? How does this work since the original beneficiary isn't benefitting from the "gift"?

These 529 tax considerations are so convoluted.

No worries. I'm learning from that aspect of the discussion as well, since there are 529s floating around for my kids and niece/nephews that may get passed along to the next generation.

As a further threadjack, and appropos of nothing, I'm fairly certain that the number of properly prepared and timely filed Form 8606s is close to zero.

 

[Car-Guy]

I don't gamble, so I report neither winnings nor losses. I've been a volunteer tax preparer though, and had clients who reported winnings. Most of those won enough to trigger the casino to issue a tax form (1099 maybe?), so that helps them be more honest.

They are called W2G's and are triggered/issued on any "single" win/hit over $1199 on slots... Note, there are no W2G's issued on table games no matter how much you win.... CTR's are issued when you "cash in" your chips from a table game over 10k, but that doesn't mean you won 10k, so no taxes are withheld...

We always ask about any losses to deduct against winnings, as that is legal to do so.

Yes, all winnings must be reported... But to claim your losses, (to off set your winnings) you must itemize.

 

[timbervest]

Similarly, have you ever gone to a casino and won any money? Did you report your gambling winnings? I'm sure most don't but technically that's false reporting. Isn't that income tax evasion?.... The IRS knows, or can easily find out in many/most cases if you win "anything" in a casino...(even a few dollars)...

Fortunately my casino losses more than offset any winnings.

 

[Car-Guy]

Fortunately my casino losses more than offset any winnings.

BUT, you still must report your winnings and pay the tax... It doesn't matter if you lost more, you still must (should ) report them as income. You can offset your winnings by itemizing and deducting your losses but your winnings will/may (if you won enough) put you in a higher tax bracket and even push you into dealing with IRMAA tier penalties. (don't ask me how I know) Of course there are other considerations when deciding to itemize, so if the dollars are small, it's probably not going to be worth it and just pay the tax on the winnings.