• The Gift Tax, Student Loans, and How It STILL Doesn’t Apply to Us (or YAY for Unified Credit)

    by  • Tagged: , ,

    Eh, so in my last post I may have very liberally applied some IRS rules to our (well, the donor’s) situation.

    Let’s go over the exemptions of the gift tax again, shall we?

    • Gifts, excluding gifts of future interests, that are not more than the annual exclusion for the calendar year,
    • Tuition or medical expenses you pay directly to a medical or educational institution for someone,
    • Gifts to your spouse,
    • Gifts to a political organization for its use, and
    • Gifts to charities.

    See that part in bold? Yeah, I may have left that out of my last post. After some exhaustive googling, it seems that there is indeed a difference between paying a student loan to an institution who gave it out (eg, bank, Salle Mae) versus paying the tuition directly to an educational institution (eg, college, preschool).

    While reading more about this whole gift tax thing, I came across something called the Unified Credit. I had a little trouble wrapping my head around this, so I hope to be a little clearer than mud when explaining it to you.

    In 2008, an individual can gift up to $12,000 to any number of individuals without any tax implications – it doesn’t even have to be reported. Any amount over $12,000 given to anyone would have to be reported and is subject to the gift tax.

    Each individual is given a $345,800 “unified credit” on gift taxes throughout his lifetime (which equates to $1 million of gifts over the annual exclusions). When a person applies this credit to gift taxes, the amount is reduced for the lifetime of the individual. Thus, if a person is taxed $1,000 on a gift and applies the credit, that person would have $344,800 remaining to apply for his lifetime.

    The credit is called “unified” because any amount that is used to credit gift taxes is then subtracted from the credit given for estate taxes. If an individual dies in 2008, he gets a $780,800 credit on his estate tax (which equates to a $2 million estate). Using the example in the last paragraph, if he applied $1,000 of credits over his lifetime to cover his gift taxes, then he would be left with a $779,800 credit on his estate taxes.

    Since the credit is subtracted from lifetime use, a person can choose to not use the credit towards the gift tax and save it for his estate. That is pretty complicated stuff that I won’t go into any more detail.

    Whew. Still with me? So what does all this mean for us?

    Not a thing. We still are not responsible for any taxes as the recipients of this gift.

    Her’s relative who gave us this gift would be responsible for reporting the gift because it is over the $12,000 annual exclusion. Of that gift, $38,000 is subject to the gift tax. Her’s relative can apply whatever remaining unified credit to that tax and probably wipe it out completely, or can pay the gift tax if she is doing some advanced estate planning.

    Her’s relative is a smart enough woman to know what she was doing – I’m pretty sure that she thought this out or at least discussed this with a tax professional.

    So, will anyone owe taxes on this gift? Probably not.

    We are NOT tax professionals so please don’t take this as advice. Seriously, we’re just bloggers. See a tax professional for a definitive answer.


    blog comments powered by Disqus