The Gift Tax, Student Loans, and How It STILL Doesn't Apply to Us (or YAY for Unified Credit)
Posted on September 05, 2008 by Him and tagged gifts, student_loan, taxes
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).
Thanks, Savvy, for having me verifying all of this by leaving your comment.
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.
(much of this was explained in this article about the estate and gift tax)
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Him | Sep 5, 2008 | Reply to triple-e
Well, we aren't married yet, but yes, she could have gifted each of us $12,000. That's a good point.
LH2004 | Sep 6, 2008
1. Your unified credit numbers are out of date.
2. "Gift" is not an acceptable verb.
3. You can be liable for your donor's gift taxes if he or she fails to pay them.
Him | Sep 6, 2008 | Reply to LH2004
1. Please cite your source. I cited from the IRS and directly linked to their document where it gives their numbers. Our readers and I would appreciate it if you could point us to the right direction so that I can report it correctly.
2. If words such as "ginormous" and "EVOO" can legitimately enter the English language, then I think the grammar police won't mind me using gift as a verb. Besides, I'm not turning this in for a grade, yeah?
3. Yes, but it seems to be very uncommon. That would mean that the donor gave over $1 million over his/her lifetime or chose to NEVER take the unified credit. I would think that if someone had $1 million to give away that he/she would have pretty good tax and legal counsel.
Again, we're not tax professionals. I was just trying to do the best I could at explaining cryptic tax code.
That sounds about right. Basically, everything over the $12k per donee gift per year whether paid before death or at death goes into the total estate tax free amount. And if McCain is elected he claims he'll abolish the estate tax altogether... So in that case there'll be no future tax implications either.
I was surprised to learn about the tax implications for people receiving gifts too. It's nice to not have to worry about it when you're the one getting money "gifted" to yourself.
Xenko | Sep 7, 2008
"2. "Gift" is not an acceptable verb."
According to who? Dictionary.com lists it as a verb. Merriam-Webster also lists it as a transitive verb (first use in circa 1550).
So, in what way is gift not a verb?
Thanks for the link!
I suggestion you post this situation on a tax forum somewhere and see what you get. I'm not sure that you are applying the Unified Credit properly, and I do think that unpaid gift taxes can come back to the recipient (although it is rare).
Also, it would be cool to know the correct answer, in case anyone ever decides to gift me $50,000 :)
Him | Sep 9, 2008 | Reply to savvy
We're definitely going to see a tax professional about this (after the wedding, of course). When we get an answer from him, I'll write a post letting everyone know what he says.
triple-e | Sep 5, 2008
Or, since you are married she could have given you 12K also (along with Her), leaving 26,000 to pay taxes on. Right?
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