529 tax question

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Edmonds_investor
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529 tax question

Post by Edmonds_investor » Sat Jun 23, 2018 3:49 pm

I understand that my spouse and I can deposit 5 years' worth of the annual gift tax limit to a child's 529 account in one lump sum ($15k x 2 parents x 5y = $150k).

Our question is this: If we cannot afford to do the full 5 years (instead, we submit $90k--for 3 years' worth), are we locked-out of contributing again the following 3 years? (For 5 years? Is the $90k averaged over 5 years automatically?)
And what is the critical date? The anniversary of the deposit? Or the tax filing date 3 or 5 years later?

47Percent
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Re: 529 tax question

Post by 47Percent » Sat Jun 23, 2018 5:09 pm

Edmonds_investor wrote:
Sat Jun 23, 2018 3:49 pm
I understand that my spouse and I can deposit 5 years' worth of the annual gift tax limit to a child's 529 account in one lump sum ($15k x 2 parents x 5y = $150k).

Our question is this: If we cannot afford to do the full 5 years (instead, we submit $90k--for 3 years' worth), are we locked-out of contributing again the following 3 years? (For 5 years? Is the $90k averaged over 5 years automatically?)
And what is the critical date? The anniversary of the deposit? Or the tax filing date 3 or 5 years later?
It won't be 3 years worth; you have a binary choice of spreading it over 5 years or not.

Spreading it over 5 years would soak up $90K/5 = $18K; $18K/2 = $9K against each of your quota.
So you both will still be left with $6K each (15-9) for the next 5 years.

You can even contribute again this year, or next year, or any subsequent year. You just need to be aware that $9K of your $15K quota has already been used up by this $90K transfer.

Even if you don't contribute any additional amount the next 3 years, the 4th and 5th years are still reduced by that $9K as the exclusion if left unused, cannot be carried over to the following year.

All the numbers are tallied within each tax year -- of course.

Edmonds_investor
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Re: 529 tax question

Post by Edmonds_investor » Sat Jun 23, 2018 5:16 pm

Thanks, 47Percent!

So, if this is the case, it sounds like it would be more advantageous for me to put in $75k (all from me--5 years' worth of $15k) and my spouse a single year's contribution of $15k--so she can contribute again the following year?

livesoft
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Re: 529 tax question

Post by livesoft » Sat Jun 23, 2018 5:35 pm

Don't forget that maybe the limit increases above $15K next year and in subsequent years.
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47Percent
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Re: 529 tax question

Post by 47Percent » Sat Jun 23, 2018 7:03 pm

Edmonds_investor wrote:
Sat Jun 23, 2018 5:16 pm
Thanks, 47Percent!

So, if this is the case, it sounds like it would be more advantageous for me to put in $75k (all from me--5 years' worth of $15k) and my spouse a single year's contribution of $15k--so she can contribute again the following year?
If you want to maximize on the exclusion -- yes. You can decide to split it up or not between the two of you. Although may sound technical at this point, you should know that this thing goes with the individual apart from the marriage.

Also, I forgot to mention in my original reply -- if you do decide to do a five year averaging, and or want to treat any and all gifts given by either one of you individually (from an individual checking account for example) as given as a couple split 50/50, then it is mandatory that you file form 709.
If you are gift-splitting, both of you need to file form 709 (follow instructions). Even if you are filing MFJ, form 709 is for each individual.

Edmonds_investor
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Re: 529 tax question

Post by Edmonds_investor » Sat Jun 23, 2018 7:16 pm

https://www.gtlaw.com/-/media/files/ins ... itting.pdf


This maybe gets hairier than I thought it was, but in reading the link above, it appears that gift-splitting is an all-or-nothing decision each tax year--and, if elected, there is no option but 50/50 and gift-splitting for all recipients in that tax year.

The bank account my wife and I have is a joint one, and, so, if we have two children, I had originally hoped to do $75k for child 1, my wife do $15k for child 1, and then my wife and I each doing $15k for child 2 (who is younger) this year.

After reading the above link, I'm not sure this is an option anymore.


Am I understanding this correctly?

47Percent
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Re: 529 tax question

Post by 47Percent » Sun Jun 24, 2018 12:38 am

Edmonds_investor wrote:
Sat Jun 23, 2018 7:16 pm
https://www.gtlaw.com/-/media/files/ins ... itting.pdf


This maybe gets hairier than I thought it was, but in reading the link above, it appears that gift-splitting is an all-or-nothing decision each tax year--and, if elected, there is no option but 50/50 and gift-splitting for all recipients in that tax year.

The bank account my wife and I have is a joint one, and, so, if we have two children, I had originally hoped to do $75k for child 1, my wife do $15k for child 1, and then my wife and I each doing $15k for child 2 (who is younger) this year.

After reading the above link, I'm not sure this is an option anymore.


Am I understanding this correctly?
Not sure what the issue is. There is nothing stopping you from doing the above. The $15K limit is per beneficiary. In the above scenario, you and your wife will NOT be electing to split the gifts.

You will max out for child 1 for 5 years.
You and Your wife will max out for child 2 for this year.

kaneohe
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Re: 529 tax question

Post by kaneohe » Sun Jun 24, 2018 6:47 am

"If a gift is of community property, it is
considered made one-half by each
spouse. For example, a gift of $100,000 of
community property is considered a gift of
$50,000 made by each spouse, and each
spouse must file a gift tax return"

"Likewise, each spouse must file a gift
tax return if they have made a gift of
property held by them as joint tenants or
tenants by the entirety"

This statement from the 709 instructions suggests that it is split automatically?

47Percent
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Re: 529 tax question

Post by 47Percent » Sun Jun 24, 2018 10:31 am

@kaneohe

I remember reading that point. Just above that, there is this:

"You must file a gift tax return to split
gifts with your spouse (regardless of their
amount) as described in Part 1—General
Information."

I understood those two combined to mean: in the absence of explicit gift tax filing to the contrary, if a gift is a community property, it is considered 50/50"; Of course, I could be wrong ;-)

kaneohe
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Re: 529 tax question

Post by kaneohe » Sun Jun 24, 2018 11:41 am

47Percent wrote:
Sun Jun 24, 2018 10:31 am
@kaneohe

I remember reading that point. Just above that, there is this:

"You must file a gift tax return to split
gifts with your spouse (regardless of their
amount) as described in Part 1—General
Information."

I understood those two combined to mean: in the absence of explicit gift tax filing to the contrary, if a gift is a community property, it is considered 50/50"; Of course, I could be wrong ;-)
Hope you're right...that's what I'm assuming...putting in double the annual exemption, not filing 709, expecting that it's regarded as 50/50 gift from spouse. Thing that's bothering me now from your post........you MUST file gift tax return to split w/ spouse (regardless of amount).........Would have been nice if their example had also included a lesser amount...not just the 100K .

Edmonds_investor
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Re: 529 tax question

Post by Edmonds_investor » Sun Jun 24, 2018 12:12 pm

Thanks, kaneohe, 47.

This phrasing is unclear to me, as well. Also, the fact that my wife and I are WA State, which is a community property state. My worry is that any gift one of us makes from our joint account will automatically be considered a split gift.

So, the $75k I was thinking of making for child 1 might be considered by the IRS to be 37.5k by each parent.

At the very least, if I were somehow able to say $75k was all me (and not my wife), I clearly cannot do $15k for child 2 + my wife doing $15k for child 2, as well--because once we have a single instance of gift splitting, the IRS considers all gifts that calendar year to be gift-split between husband and wife.

I am feeling like the only safe choice is $30k for each child this year, gift-split as 15k from each parent.

47Percent
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Re: 529 tax question

Post by 47Percent » Sun Jun 24, 2018 12:30 pm

Edmonds_investor wrote:
Sun Jun 24, 2018 12:12 pm
Thanks, kaneohe, 47.

This phrasing is unclear to me, as well. Also, the fact that my wife and I are WA State, which is a community property state. My worry is that any gift one of us makes from our joint account will automatically be considered a split gift.

So, the $75k I was thinking of making for child 1 might be considered by the IRS to be 37.5k by each parent.

At the very least, if I were somehow able to say $75k was all me (and not my wife), I clearly cannot do $15k for child 2 + my wife doing $15k for child 2, as well--because once we have a single instance of gift splitting, the IRS considers all gifts that calendar year to be gift-split between husband and wife.

I am feeling like the only safe choice is $30k for each child this year, gift-split as 15k from each parent.

If my supposition above is correct (as also what Kanehoe's interpretation is):

If you write a check for $15K and your wife writes a check for $15K, it is not really gift splitting. You are just making two individual gifts. You can even write in the notation "Gift from XXX" and "Gift from YYY", if you would prefer. In fact that is what my accountant asked me to do when I last used him.

To summarize my assumptions/understanding:

If a gift is made for amounts greater than $30k to one beneficiary (assuming $15k exemption) by a couple, then:
1) form 709 needs to be filed by at least one of them owning up to some or all of the gift.
2) if that reduces the remainder of the gift to less than $15K nothing else is necessary.
3) if not, the other person also needs to file 709 owning up to the remainder of the amount.
4) Instead of 1,2, and 3: they can file gift splitting option through 709, and then each own half of the amount above $30K.
5) If amount is $30K or less to begin with, gift splitting election is optional as that is what is assumed.

If splitting is elected, ALL gifts are split down the middle.
Last edited by 47Percent on Sun Jun 24, 2018 12:34 pm, edited 1 time in total.

Edmonds_investor
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Re: 529 tax question

Post by Edmonds_investor » Sun Jun 24, 2018 12:34 pm

But what about the $75k check?

Is your understanding that I can call it all from me? Or is the danger that the IRS would automatically consider that gift-split because it came from a joint account in a community property state?

47Percent
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Re: 529 tax question

Post by 47Percent » Sun Jun 24, 2018 12:42 pm

In your example ($75K from you; $15K from each of you):

You sign the check for $75K with the notation "Gift from XXXXX"

Only you file form 709; mention only the $75K gift in entirety; opt for 5 year spreading option. That's it.
You would have exhausted your exemption to that beneficiary for 5 years.

Child 2 gift doesn't need any reporting as it is within the individual exemption.
But make sure each of you write & sign the checks separately, with the notation in memo area: Gift from XXXXX on one, and Gift from YYYYY on the other;

Your spouse does not file 709, (and no election to split by either of you, of course)

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HueyLD
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Re: 529 tax question

Post by HueyLD » Sun Jun 24, 2018 1:16 pm

Edmonds,

You live in a community property state and its law on property ownership is very different from that of a common law state. There are also differences among community property states. The first issue you need to understand is the definition of community property vs. separate property in your state of WA.

Advice from those who are not familiar with your community property state law should not be relied upon for filling out Form 709 because you have to sign under penalties of perjury on the form.

In general (you need to check the specifics for WA), if a gift is made of community property (I.e., not separate property), it is considered to be made 50/50 by each spouse. If you want the gift to be solely yours, the money has to come from separate property such as inheritance, pre-marital assets etc. that has not been commingled with community properties.

Do you have any separate property?

There is no need to split the gift if it is considered 50/50 by law. Form 709 both on the form itself and in the instructions, tells you where to put what. You should study the form carefully several times. If you still don't understand it, you may want to obtain paid professional assistance.

Edmonds_investor
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Re: 529 tax question

Post by Edmonds_investor » Mon Jun 25, 2018 2:40 am

Thanks, 47 and Huey.

I am convinced that where I live (and with how little I brought into the marriage) I don’t actually have separate property. The bank accounts are all community/shared. It is easier to think of all gifts we make as 50/50.

But I also better understand the rules of overlapping 5y lump sum gifts now, and after this discussion feel much more comfortable understanding how to not exceed gift tax limits when two separate 5y gifts (started in different years) partially overlap.

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