If my grandmother gives my dad $10,000 as a gift each month, what will my dad have to pay in taxes?

Question

My grandmother has recently discovered gas on her property, and is generously dividing her monthly EOG checks between her children. Each month, she is giving my dad (and each sibling) about $10,000. What is a guess-timation of what he will have to pay in taxes (a range) on this money? (He is retired, and has no income).
P.S. I ask because one of the siblings has told my grandmother to stop giving monthly checks (to all of them), because SHE doesn't want to have to pay taxes. But wouldn't the remaining money be worth whatever the taxes are? I am confused at her logic...

Answer 1

Well! I am very happy for your grandma that she found gas. I used to own EOG stocks (when it was under $10 :)

Unless your grandma decide to incorp and issue 1099MISC and have the royalty income as your father income, this is a gift.
http://www.irs.gov/newsroom/article/0,,id=107815,00.html

If you gave any one person gifts in 2006 that valued at more than $12,000, you must report the total gifts to the Internal Revenue Service and may have to pay tax on the gifts.

The person who receives your gift does not have to report the gift to the IRS or pay gift or income tax on its value.

Gifts include money and property, including the use of property without expecting to receive something of equal value in return. If you sell something at less than its value or make an interest-free or reduced-interest loan, you may be making a gift.

There are some exceptions to the tax rules on gifts. The following gifts do not count against the annual limit:

Tuition or Medical Expenses that you pay directly to an educational or medical institution for someone's benefit
Gifts to your Spouse
Gifts to a Political Organization for its use
Gifts to Charities

Thereby, there are several way to resolve this:

A. She issue your dad a 1099MISC. And your dad pay income tax on it.
Income tax: your father's responsiblity
No gift tax or estate tax involved

B. She can treat it as gift. And file form 709 and pay no tax.
http://www.irs.gov/pub/irs-pdf/f709.pdf
Income tax: your grandma's responsiblity
No gift tax; but estate tax involved

That will effect the Unified Credit for her estate.

Year of Death: Filing (unified credit- by the way we will go back to the old rule after 2010 if congress does not do anything about the tax law)
Requirement:

2006, 2007, and 2008 2,000,000
2009 3,500,000
Intro to Estate and gift tax
http://www.irs.gov/pub/irs-pdf/p950.pdf

C. She treats it as a loan. Your father pay back the money plus the interest and no one get in trouble.

Income tax: your grandma's responsiblity
No gift tax; no estate tax involved

D. Please use it for the purpose mentioned:
educational or medical institution for someone's benefit
Gifts to your Spouse
Gifts to a Political Organization for its use
Gifts to Charities

Does your father has some kind of medical condition? She can pay for it and that is not a gift. Do you or your children go to school? Grandma pays for it. That is not a gift.

Income tax: your grandma's responsiblity
No gift tax; no estate tax involved

(Just becareful! No retroactive here!!! It may effect your dependency claiming on the tax returns. Same as the suggestion below)

E. Spread out the wealth:

Are you married? Do you have any children? She can contribute to each one of you $12,000 per year.

Income tax: your grandma's responsiblity
No gift tax; no estate tax involved

(More suggestions? :)

Answer 2

She is your grandmother, so she has grandchildren. If she was to divide up her gifts among more people, such as the grandchildren, those gifts up to $12K a year aren't going to figure in her estate.

She will soon exceed her $1 milliion lifetime gift exclusion. Estate taxes are going to be an issue for her even if she continues to give away the royalties and doesn't keep them. She needs some tax help to minimize her estate taxes. What a nice grandma.

Recipients of her gifts aren't going to pay income taxes, but since this is a large amount of money, tax planning is needed for the recipients as well, since any income generated by the gifts is taxable.

Answer 3

Gifts are not taxable for the recipient, so your dad and his siblings wouldn't owe any tax on it, or even have to report it. But this amount is above the limit for gift tax, so your grandmother would have to file a gift tax return each year and pay a gift tax on the amount given to each child over $12,000. She has a lifetime allowance she can use to avoid tax, but once she uses that up, not only are the gifts taxable, but it will affect her estate taxes also. It would be a good idea for your grandmother to consult a CPA.

Answer 4

Your Dad's tax liability (and that of the other siblings) will be exactly: $0

Your grandmother's tax liability on the other hand could be substantial. Gift taxes are levied on the donor, not the recipient. A taxpayer is allowed to give up to $12,000 per year per recipient without having to file a Gift Tax return or pay any Gift Tax.

Once gifts exceed $12k per recipient per year the donor will have to dip into their unified lifetime credit (currently $1 million) to avoid Gift Tax liability. With giving amounts this large she will use up her lifetime credit in a few years depending upon how many recipients there are. The unified credit also goes against her estate's Estate Tax exclusion so will possibly affect the tax position of her estate when she passes.

Your grandmother should consult with a CPA who specializes in estate planning to minimize her tax liability as well as to prepare the necessary Gift Tax returns.

Answer 5

See IRS Tax Tip 2007-39.

For more information, get the IRS Publication 950, Introduction to Estate and Gift Taxes, IRS Form 709, United States Gift Tax Return, and Instructions for Form 709. They are available at the IRS Web site at IRS.gov in the Forms and Publications section or by calling 800-TAX-FORM (800-829-3676).

Gift and estate tax laws are for for example, among the most complex areas of tax law. The returns are pages long and comparable to taking an in-depth accounting class. And this would be an understatement. You get the point I'm sure.

I am sure that most people will not be able to complete them and it keeps up with Dr. Einstein's mention, the most complex thing is the income tax. He might have said that for any number of reasons, those which you speak of as well. In the areas of gift, inheritance, estate, and other tax rules which apply in similar areas.

Certainly it could be possible, though again, you know you might think about the the idea that two spouses can give out gifts of the same amount as well. As one poster stated recently, yearly gifts are limited to 12k per giftee (grandma would be the gfitor) but there are known exceptions for areas that deal with medical and spouses, for example.

Review the publication as you will find more information that what you'll ever see pased on here. For sure, It is a good one to read on this area. You may be referred to 10k other publications in the process but dont' get discouraged. You'l finally end up on the road you need travel.

As one submitter responded, lifetime limits may also apply as well as other things. Even so, there is little doubt the statement as with all tax matters holds especially true in this context; every situation differs and your grandmother is no exception to this rule.

One would be a fool to say what the real consequences are here; if any. Much like our firm stating to you or your grandma, we can save you money, even though we have never seen your return or nor do we know truly anything about your tax related or personal situations. Any person worth any weight in accounting knows this and those who profess otherwise; our suggestion, run, run until you see dust clouds forming on the horizon.

The point should be taken to heart. Every situation differs and no two are alike. I repeat, no two are ever alike. How will it affect her estate and the list goes on until you come to see why most people believe what Dr. Einstein mentioned. Indeed, the Income Tax Code is most likely the most complicated thing that was ever invented by man. Running on its own steam, self extracting principles to drive the ordinary man or woman batty. Dont' feel bad as though we may do this stuff for a living everyday of the week and then some, a fool is he to say they are not living testament to complexities of this thing we refer to as the Internal Revenue Code.

In the process you may wish to check out our website as we we have much information for business and individuals alike including a vast array of articles accessed under the sites search features and a plethora of finaical based calculators to assit in lowering your debt, determing tax liability and much more. But make sure you check out those IRS publications.

For knowledge as they say is power and the only thing you can count on truly is death and taxes.

Wishing you well in your endeavors. Wayne

Answer 6

Grandma is going to be paying ALOT of gift tax. Please have her consult a CPA to figure out the best way to handle this situation.

Answer 7

When it is a gift, there should be no tax. Your dad and Grandmom may have to sign some forms stating that it is a gift, but that should be about it. Great for your dad and grandmother because retirement is hard to live on.

Answer 8

You can give $10,000 annually with no gift taxes due. If your Grandmother is married, then as a couple they can give $20,000 annually even if it's from just one of them as long as the spouse agrees. Now, if you dad is married, that amount can go to a total of $40,000 ($10K per person) with no tax implications.

As for your aunt not wanting to pay taxes....is she crazy?? I would LOVE to pay taxes on extra money, since it is EXTRA MONEY!!!!!!!!!!! Thats like saying you wouldn't want to hit the lottery so as not to pay taxes!!

Congratulations to your family!