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Hi,

My wife and I are building a much more expensive house. My parents want to help us with the downpayment, and we want to put down as much as possible at closing. Can my parents give us $50,000 toward the downpayment or can they not because that's more than the $11,000 gift tax amount? If my parents gave us $50,000 toward the house, would they have to pay a gift tax and when would they pay it? They also want to fund my kids' college funds as well; is the limit the same for that and should they do that in a separate year or is it okay to do it in the same year? If there is a tax and if it is paid years later, do they have to keep records on it or does the IRS already know and thus calculate it for them? Thanks.
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Can my parents give us $50,000 toward the downpayment or can they not because that's more than the $11,000 gift tax amount?

You + your wife + your mother + your father = 4 tax entitites.

Which means that your mother can give you $11,000 per year without tax consequences.
And your mother can give your wife $11,000 per year.
And your father can give you $11,000 per year.
And your father can give your wife $11,000 per year.

So your parents can give you $44,000 per year without worrying about the gift tax. If they do give you more they would not pay tax now, but it would reduce their exemption amount later (and someone who knows more than I do should explain what that means.)

They also want to fund my kids' college funds as well; is the limit the same for that and should they do that in a separate year or is it okay to do it in the same year?
Depends on what sort of accounts your kids' college funds are.

- Just a bank or brokerage account in your name or your wife's name? Yes, the gift tax totals mentioned above apply.
- A UTMA or UGMA in your child's name? Then the gift is to your child.
- A Coverdell or 529 plan? Also a gift to your child (I think), but the 529 plans allow them to clump several years of gifts.

Note that when the time comes they could pay moneys for tuition directly to the college with no gift tax ramifications.

Hope this helps!
- Megan

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Here's all the info on gift tax (and estate tax) that you need

http://www.irs.gov/publications/p950/index.html (read the 'Unified Credit' and 'Gift Tax' sections)

Basically, Megan is right. Each person can give each person $11k in each year without any implications. Beyond that, you begin having implications, but it first goes against your lifetime 'unified credit' of $345,800

Let's say they gave you $50K. By Megan's example above, $44K is completely free and clear. The other $6K they have to report as beyond the exclusion. Let's say they're in the 28% tax bracket, so they'd pay $1680 in tax. All they do is subtract is amount from their lifetime unified credit of $345,800, leaving them with $344,120 remaining in their lifetimes. Only if they get this number down to zero in their life do they need to actually start paying taxes on gifts.

In fact, the $345,800K (representing up to ~$1 million) in gifts may apply to each of them separately, though I'm not sure about that - read the IRS pub for full details.


P.S. You may think it's none of my business, and it may not be, but before you embark on something like this, I would recommend you buy or borrow the Millionaire Next Door and each the chapter on EOC - Economic Outpatient Care.

Your parents helping to buy you a house can lead to overspending for the rest of your life. If they help you buy a house with a mortage you can't afford, then you'll have trouble saving forever. If it's in a higher status neighborhood, you may feel compelled to pay more to keep it up, pay more for nicer cars to impress the neighbors, send your kids to private school because those in your neighborhood look down on the public schools, etc, etc, etc. It depends on the situation and the people involved, but more often than not, large gifts from parents cause more financial problems than they solve.

Just something you may want to think about and a book you may want to pick up before you make a big decision like this.
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Here's all the info on gift tax (and estate tax) that you need

http://www.irs.gov/publications/p950/index.html (read the 'Unified Credit' and 'Gift Tax' sections)

Basically, Megan is right. Each person can give each person $11k in each year without any implications. Beyond that, you begin having implications, but it first goes against your lifetime 'unified credit' of $345,800

Let's say they gave you $50K. By Megan's example above, $44K is completely free and clear. The other $6K they have to report as beyond the exclusion. Let's say they're in the 28% tax bracket, so they'd pay $1680 in tax. All they do is subtract is amount from their lifetime unified credit of $345,800, leaving them with $344,120 remaining in their lifetimes. Only if they get this number down to zero in their life do they need to actually start paying taxes on gifts.


You started off fine, but went off course. If this is the first gift the parents gave which exceeded the annual gift limit, the excess $6000 would be taxed at 18%, not 28%. You don't use the income tax bracket, but the gift tax bracket which is significantly different. So, in this case the parents would use $1,080 of their lifetime unified credit (presumably $540 each). If the parents had already given other taxable gifts in their lifetimes, the gift tax rate would be higher.

Ira
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Megan and Delta,

Thanks a lot for your advice; I appreciate it. You both have been very helpful. I'll look for MILLIONAIRE NEXT DOOR.

I agree with you, Delta, that large gifts can be problematic, but we don't drive a Lexus and, in a town where many people send their kids to private school, our kids go to public schools. We have been cutting back on some expenses. My parents are very generous and made this offer to make the downpayment partly because they are concerned about my health. My wife, who has been greatly inspired by HGTV, has this dream about building a beautiful big house, and I, despite being worried about the big expense, reluctantly agreed--to make her happy. Knowing it would cost a lot, I started making more money by working many extra hours in a second job; I've been working seven days a week. Recently this has been wearing me out and negatively affecting my health. My parents, worried by how my health has been deteriorating, told me to stop working the second job and offered to make a large downpayment and to fund my kids' college funds. So that's why my parents offered to do this.

Thanks for the link. I just read parts of it and will read the rest later tonight. But I still have a few questions. It says that my parents can jointly give the money. Does it then have to come from a joint account? And should the checks be payable to me AND my wife or me OR my wife or just one of us (I mean the checks my parents write to us and that we put in the bank before we write a check to the builder--I don't suppose the money has to go directly from my parents to the builder). Is there also an exclusion of $11,000 for the money my parents give to my kids for college or other expenses? Also, if my parents ever went beyond the $11,000 limit in the past (I'm not sure if they did), can the IRS tell them so that they can know? How does the IRS keep track of it? I just want to make sure that I do everything correctly and legally. Thanks.



Delta said: <<Here's all the info on gift tax (and estate tax) that you need

http://www.irs.gov/publications/p950/index.html (read the 'Unified Credit' and 'Gift Tax' sections)

Basically, Megan is right. Each person can give each person $11k in each year without any implications. Beyond that, you begin having implications, but it first goes against your lifetime 'unified credit' of $345,800

Let's say they gave you $50K. By Megan's example above, $44K is completely free and clear. The other $6K they have to report as beyond the exclusion. Let's say they're in the 28% tax bracket, so they'd pay $1680 in tax. All they do is subtract is amount from their lifetime unified credit of $345,800, leaving them with $344,120 remaining in their lifetimes. Only if they get this number down to zero in their life do they need to actually start paying taxes on gifts.

In fact, the $345,800K (representing up to ~$1 million) in gifts may apply to each of them separately, though I'm not sure about that - read the IRS pub for full details.


P.S. You may think it's none of my business, and it may not be, but before you embark on something like this, I would recommend you buy or borrow the Millionaire Next Door and each the chapter on EOC - Economic Outpatient Care.

Your parents helping to buy you a house can lead to overspending for the rest of your life. If they help you buy a house with a mortage you can't afford, then you'll have trouble saving forever. If it's in a higher status neighborhood, you may feel compelled to pay more to keep it up, pay more for nicer cars to impress the neighbors, send your kids to private school because those in your neighborhood look down on the public schools, etc, etc, etc. It depends on the situation and the people involved, but more often than not, large gifts from parents cause more financial problems than they solve.

Just something you may want to think about and a book you may want to pick up before you make a big decision like this.>>
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Thanks for the link. I just read parts of it and will read the rest later tonight. But I still have a few questions. It says that my parents can jointly give the money. Does it then have to come from a joint account?

No.

And should the checks be payable to me AND my wife or me OR my wife or just one of us (I mean the checks my parents write to us and that we put in the bank before we write a check to the builder--I don't suppose the money has to go directly from my parents to the builder).

The best way, for tracking purposes, is to issue four checks, each for $11,000. However, your parents can issue two checks for $22,000 each -- one payable to you and one to your wife. If they choose to go this route, they will still have to file a Gift Tax return (Form 709) indicating that they are splitting the $22,000 gift between them, thereby avoiding gift tax. The money should go to you first (again, this just helps identify the gift), but doesn't have to.

Is there also an exclusion of $11,000 for the money my parents give to my kids for college or other expenses?

If they give the money directly to the children, yes. However, they can pay any amount of tuition (but only tuition) directly to the college and still give another $11,000 each to the child.

Also, if my parents ever went beyond the $11,000 limit in the past (I'm not sure if they did), can the IRS tell them so that they can know?

Possibly. They should know because they would have had to file a Gift Tax return in any year where they exceeded the limit. (BTW, the limit was $10,000 before, I think, 2004.)

How does the IRS keep track of it? I just want to make sure that I do everything correctly and legally. Thanks.

Through the Form 709 filings.

Ira
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You started off fine, but went off course. If this is the first gift the parents gave which exceeded the annual gift limit, the excess $6000 would be taxed at 18%, not 28%.

Whoops. Well, I got the general idea, never claimed to be an expert. I'm sure the documentation can correct any details I messed up.


I agree with you, Delta, that large gifts can be problematic, but we don't drive a Lexus and, in a town where many people send their kids to private school, our kids go to public schools.

I certainly understand your situation and it is more certainly up to you, your wife, and your parents to decide what and how is appropriate for you. Also, I think it's absolutely critical that your wife is on the same page as you as far as living within your means and saving.

Don't get me wrong, I think it's very nice of your parents to make those offers, as long as they don't lead to future need for economic crutches. For instance, I wouldn't use a large downpayment gift as an excuse to get a larger house than you can't afford and will have trouble meeting the mortage on, or have to sacrifice your health and rest and sanity and savings, etc. Also, while you may not feel pressure to get a Lexus or spend highly now, would you if you lived on a block where that was the norm? Would your wife? It's all important things to think about it.

As a general number, if you're parents were giving you $50K, you could certainly use that as a excuse to buy a house worth $50K more if you think it's wise otherwise, and thereby have the same mortage payments as you would have otherwise. If if you use a 20% downpayment as a change to buy a house worth $250K more, then you're probably asking to be on economic assistance for a long long time. Obviously I'll leave the judgements to you, and I'm glad you'll pick up Millionaire Next Door, as it shows you ways to think about these things and cause and effect relationships you may have never realized before, but the decision is ultimately yours.

If you read the book and decide that your wife is a 'UAW' (under accumulator of wealth) it may be good to have her read the book and discuss your real goals in life. Is financial independence and a long and happy retirement more important? Or is a big house with a nice garden?


As for your question on the gift tax, I'm not sure of all the details - joint checking, etc - do read the document in full and see if you can find any other related ones. You can also call up and talk to the IRS (they're nicer than you imagine), or if they can't answer your question via their service, it may be worth paying a small sum to a tax advisor to get a certified answer.

As for college expenses, I think Megan did a good job showing the 3 (or I guess 4) ways in which they can give you money for that. They can give it directly to you (same gift tax rules and yearly limits apply), they can give it to your child (often by way of a deposit in a custodial (UGMA/UTMA) account or a trusto, which is then a gift to the child, also subject to the $11K limit, but separately from that given to you, or they can make a contribution to the 529 college savings plan that is for your child (check your state's rules on 529 plans for details, rules, and limits on that).

Also, Megan mentioned that just paying the tuition bill when it arrives is not counted as a gift. I believe that is covered in the IRS link I sent you before. Definitely check into that option too.

As far as the IRS keeping track of it, as far as I know, they don't, but I most certainly could be wrong about that. Your parents are responsible for making sure they report all things legally. If it happened in the past and they didn't report it, well, either they may want to look into it and do amended returns, or they got away with it - depending on your scruples and ability to research the facts. I do believe the IRS gets notified of large deposits though, so it could play into the odds of triggering an audit.
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My wife, who has been greatly inspired by HGTV, has this dream about building a beautiful big house,

My beloved Cousin Barbara, who folks on the Baby Boomer Board know well, is addicted to Men in Tool Belts, a/k/a HGTV. One never knows what she'll do next.

Funny this should come up twice in a day, but has your wife seen "Mr. Blandings Builds His Dream House"? Not nearly as good, but also instructive, is "The Money Pit."

Phil

Movie fan and general sloth
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Thanks for the replies. I'll have my parents to check to make sure that they never went over the allotted amount. I don't think they did, particularly since they never helped my wife and I pay for a house before. But it wouldn't hurt for them to go over their checks. If they did go over $44,000, they'll have to do an amended return. Thanks again.
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Thanks for the replies. I'll have my parents to check to make sure that they never went over the allotted amount. I don't think they did, particularly since they never helped my wife and I pay for a house before. But it wouldn't hurt for them to go over their checks. If they did go over $44,000, they'll have to do an amended return. Thanks again.

No. If either of them went over $11,000 from one of them to any single individual, s/he will have to file a Gift Tax return. This is Form 709 and is totally independent from the regular income tax Form 1040.

Ira
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