A young friend made a tax mistake - can it be undone?

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TheEleven
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A young friend made a tax mistake - can it be undone?

Post by TheEleven »

A younger guy I know got a small, unexpected windfall gift from his dad of $50,000. Turns out this young fella knows even less about taxes than I do. Last night I was talking about it with his fiancé and we were wondering how to go about receiving that money efficiently. Unknown to us until later that night he had already just up and deposited the full check. I don't know much about taxes but I do know there's got to be a better way than to take that kind of tax hit all at once.

So I'm just wondering if that can be undone? Can he quickly return the money for a more tax efficient do-over of some kind? Or will that just trigger a tax event back to his dad for receiving the money back? Any ideas before he has pay a CPA to look into it?
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Re: A young friend made a tax mistake - can it be undone?

Post by jebmke »

Gifts are not taxed for the recipient.
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sailaway
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Re: A young friend made a tax mistake - can it be undone?

Post by sailaway »

There is no tax hit for receiving a gift. The giver should file the appropriate paperwork with the IRS, but even that may not be necessary if the giver is married.
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Re: A young friend made a tax mistake - can it be undone?

Post by Gill »

Don't panic. He didn't do anything wrong and there are no tax consequences to him. Forget the CPA. His Dad should probably file a gift tax return, however.
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Raymond
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Re: A young friend made a tax mistake - can it be undone?

Post by Raymond »

OP, I hope you didn't scare the dickens out of your friend unnecessarily.

If you did mention all this to him, be a good person and correct what you said earlier.

If you didn't, don't say anything.

I know I wouldn't :D
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TheEleven
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Re: A young friend made a tax mistake - can it be undone?

Post by TheEleven »

Thanks for the replies everyone! :beer Looks like although he jumped without looking he did no harm. :happy
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TheEleven
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Re: A young friend made a tax mistake - can it be undone?

Post by TheEleven »

Raymond wrote: Thu Jun 10, 2021 3:16 pm OP, I hope you didn't scare the dickens out of your friend unnecessarily.

If you did mention all this to him, be a good person and correct what you said earlier.

If you didn't, don't say anything.

I know I wouldn't :D
I said nothing to him either way. His Fiancé on the other hand owes him a nice dinner or something :P
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Re: A young friend made a tax mistake - can it be undone?

Post by RickBoglehead »

TheEleven wrote: Thu Jun 10, 2021 2:29 pm Turns out this young fella knows even less about taxes than I do.
Or maybe he knows more than you think. :wink:
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Doctor Rhythm
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Re: A young friend made a tax mistake - can it be undone?

Post by Doctor Rhythm »

Not only is there no particular tax issue with depositing a $50,000 check, I’m not even aware of any alternatives. What else could your young (but adult) friend have done to receive the gift?
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Re: A young friend made a tax mistake - can it be undone?

Post by Kaizen Soze »

Doctor Rhythm wrote: Thu Jun 10, 2021 4:33 pm Not only is there no particular tax issue with depositing a $50,000 check, I’m not even aware of any alternatives. What else could your young (but adult) friend have done to receive the gift?
$15k/yr. towards the annual gift-tax exclusion. If the dad has a spouse, $30k/yr.
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Re: A young friend made a tax mistake - can it be undone?

Post by leeks »

Kaizen Soze wrote: Fri Jun 11, 2021 11:24 am
Doctor Rhythm wrote: Thu Jun 10, 2021 4:33 pm Not only is there no particular tax issue with depositing a $50,000 check, I’m not even aware of any alternatives. What else could your young (but adult) friend have done to receive the gift?
$15k/yr. towards the annual gift-tax exclusion. If the dad has a spouse, $30k/yr.
Why does that matter? The giver just has to file a form. Isn't the lifetime limit over 11 million before any tax is due? Recipient could offer to prepare the tax form, it certainly doesn't seen worth forgoing $35K to save someone from filing a form. I never understand the focus on the $15K "limit" in boglehead discussions.
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Re: A young friend made a tax mistake - can it be undone?

Post by fyre4ce »

leeks wrote: Fri Jun 11, 2021 11:44 am
Kaizen Soze wrote: Fri Jun 11, 2021 11:24 am
Doctor Rhythm wrote: Thu Jun 10, 2021 4:33 pm Not only is there no particular tax issue with depositing a $50,000 check, I’m not even aware of any alternatives. What else could your young (but adult) friend have done to receive the gift?
$15k/yr. towards the annual gift-tax exclusion. If the dad has a spouse, $30k/yr.
Why does that matter? The giver just has to file a form. Isn't the lifetime limit over 11 million before any tax is due? Recipient could offer to prepare the tax form, it certainly doesn't seen worth forgoing $35K to save someone from filing a form. I never understand the focus on the $15K "limit" in boglehead discussions.
I agree that there is probably too much emphasis on the gift tax form, but it's not nothing either. It's reporting a transaction to the government, which gives people various levels of discomfort. More importantly, there a chance the estate tax exemption could go down (as it's scheduled to do in 2026) and/or the poster's wealth could increase, as happens with many BH's. Personally, I think if a transaction can be reasonable restructured to avoid needing a gift tax form, and it's not a big extra hassle (eg. giving half in November and half the following January) it's probably worth doing. But in other cases where there's no way around it and the giver is not likely to exceed the exemption, just file the form and forget about it.

PS I like your soup!
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Re: A young friend made a tax mistake - can it be undone?

Post by HootingSloth »

fyre4ce wrote: Fri Jun 11, 2021 11:58 am
leeks wrote: Fri Jun 11, 2021 11:44 am
Kaizen Soze wrote: Fri Jun 11, 2021 11:24 am
Doctor Rhythm wrote: Thu Jun 10, 2021 4:33 pm Not only is there no particular tax issue with depositing a $50,000 check, I’m not even aware of any alternatives. What else could your young (but adult) friend have done to receive the gift?
$15k/yr. towards the annual gift-tax exclusion. If the dad has a spouse, $30k/yr.
Why does that matter? The giver just has to file a form. Isn't the lifetime limit over 11 million before any tax is due? Recipient could offer to prepare the tax form, it certainly doesn't seen worth forgoing $35K to save someone from filing a form. I never understand the focus on the $15K "limit" in boglehead discussions.
I agree that there is probably too much emphasis on the gift tax form, but it's not nothing either. It's reporting a transaction to the government, which gives people various levels of discomfort. More importantly, there a chance the estate tax exemption could go down (as it's scheduled to do in 2026) and/or the poster's wealth could increase, as happens with many BH's. Personally, I think if a transaction can be reasonable restructured to avoid needing a gift tax form, and it's not a big extra hassle (eg. giving half in November and half the following January) it's probably worth doing. But in other cases where there's no way around it and the giver is not likely to exceed the exemption, just file the form and forget about it.

PS I like your soup!
Agree with all of this.

I also want to flag that it is sometimes missed that at least one Form 709 (sometimes two) must be filed in order to elect to split gifts between spouses. For example, if a married couple makes a $20,000 gift to their unmarried child, one of the spouses still needs to file a Form 709 to elect, with the consent of the other spouse, to split the gift, even though they will both end up being under the annual exclusion amount as a result of the split gift election.
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Ben Mathew
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Re: A young friend made a tax mistake - can it be undone?

Post by Ben Mathew »

HootingSloth wrote: Fri Jun 11, 2021 12:30 pm I also want to flag that it is sometimes missed that at least one Form 709 (sometimes two) must be filed in order to elect to split gifts between spouses. For example, if a married couple makes a $20,000 gift to their unmarried child, one of the spouses still needs to file a Form 709 to elect, with the consent of the other spouse, to split the gift, even though they will both end up being under the annual exclusion amount as a result of the split gift election.
Not sure about this. From the IRS website: FAQ on gift taxes
What if my spouse and I want to give away property that we own together?

You are each entitled to the annual exclusion amount on the gift. Together, you can give $22,000 to each donee (2002-2005) or $24,000 (2006-2008), $26,000 (2009-2012) and $28,000 on or after January 1, 2013 (including 2014, 2015, 2016 and 2017). In 2018, 2019, 2020 and 2021, the total for you and your spouse is $30,000.
The bolded part above seems to say that the annual exclusion is still applies to each individual--i.e. the rule is still $15,000 per person, not $30,000 for a couple. I would think that even without splitting, each person can still gift up to $15,000 each to a third party.

The question on form 709 is:
Gifts by husband or wife to third parties. Do you consent to have the gifts (including generation-skipping transfers) made
by you and by your spouse to third parties during the calendar year considered as made one-half by each of you?
From the instruction on form 709:
If you and your spouse both consent, all gifts (including gifts of property held with your spouse as joint tenants or tenants by the entirety) either of you make to third parties during the calendar year will be considered as made one-half by each of you if all of the following apply.
From the form 709 instructions it sounds like if spouses made unequal gifts, they can choose to treat it as 50-50 -- i.e., it's an added option for spouses to treat non 50-50 gifts as 50-50 if they want, not a requirement for gifts that are already 50-50.

Would like to know if this is not correct.
HootingSloth
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Re: A young friend made a tax mistake - can it be undone?

Post by HootingSloth »

Ben Mathew wrote: Fri Jun 11, 2021 1:11 pm
HootingSloth wrote: Fri Jun 11, 2021 12:30 pm I also want to flag that it is sometimes missed that at least one Form 709 (sometimes two) must be filed in order to elect to split gifts between spouses. For example, if a married couple makes a $20,000 gift to their unmarried child, one of the spouses still needs to file a Form 709 to elect, with the consent of the other spouse, to split the gift, even though they will both end up being under the annual exclusion amount as a result of the split gift election.
Not sure about this. From the IRS website: FAQ on gift taxes
What if my spouse and I want to give away property that we own together?

You are each entitled to the annual exclusion amount on the gift. Together, you can give $22,000 to each donee (2002-2005) or $24,000 (2006-2008), $26,000 (2009-2012) and $28,000 on or after January 1, 2013 (including 2014, 2015, 2016 and 2017). In 2018, 2019, 2020 and 2021, the total for you and your spouse is $30,000.
The bolded part above seems to say that the annual exclusion is still applies to each individual--i.e. the rule is still $15,000 per person, not $30,000 for a couple. I would think that even without splitting, each person can still gift up to $15,000 each to a third party.

The question on form 709 is:
Gifts by husband or wife to third parties. Do you consent to have the gifts (including generation-skipping transfers) made
by you and by your spouse to third parties during the calendar year considered as made one-half by each of you?
From the instruction on form 709:
If you and your spouse both consent, all gifts (including gifts of property held with your spouse as joint tenants or tenants by the entirety) either of you make to third parties during the calendar year will be considered as made one-half by each of you if all of the following apply.
From the form 709 instructions it sounds like if spouses made unequal gifts, they can choose to treat it as 50-50 -- i.e., it's an added option for spouses to treat non 50-50 gifts to 50-50, not a requirement for gifts that are already 50-50.

Would like to know if this is not correct.
Ben, in the "Who Must File" section, the instructions to Form 709 also state:
You must file a gift tax return to split gifts with your spouse (regardless of their amount) as described in Part 1—General Information, later.
I think how this plays out can depend on the circumstances. I understand that some return preparers take the position that, for example, if two spouses in a separate property state each write a check to the recipient that no split gift election is required. Not having looked at this question in great depth, that seems reasonable to me, although I would consider filing a prophylactic election as long as the taxpayer is not sensitive about such things. I have not studied how community property rules might affect this. For a greater than $15,000 gift made with a single check, I think filing to make the split gift election is the right thing to do.

Edited to add: Just to clarify, the phrase "If you and your spouse both consent" in what you quoted above matters. The mechanism for spouses to consent is to file a properly completed Form 709. I would not read that passage of the instructions as a default rule, but as instead describing the results of a properly-made split gift election.
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Re: A young friend made a tax mistake - can it be undone?

Post by SuzBanyan »

fyre4ce wrote: Fri Jun 11, 2021 11:58 am
leeks wrote: Fri Jun 11, 2021 11:44 am
Kaizen Soze wrote: Fri Jun 11, 2021 11:24 am
Doctor Rhythm wrote: Thu Jun 10, 2021 4:33 pm Not only is there no particular tax issue with depositing a $50,000 check, I’m not even aware of any alternatives. What else could your young (but adult) friend have done to receive the gift?
$15k/yr. towards the annual gift-tax exclusion. If the dad has a spouse, $30k/yr.
Why does that matter? The giver just has to file a form. Isn't the lifetime limit over 11 million before any tax is due? Recipient could offer to prepare the tax form, it certainly doesn't seen worth forgoing $35K to save someone from filing a form. I never understand the focus on the $15K "limit" in boglehead discussions.
I agree that there is probably too much emphasis on the gift tax form, but it's not nothing either. It's reporting a transaction to the government, which gives people various levels of discomfort. More importantly, there a chance the estate tax exemption could go down (as it's scheduled to do in 2026) and/or the poster's wealth could increase, as happens with many BH's. Personally, I think if a transaction can be reasonable restructured to avoid needing a gift tax form, and it's not a big extra hassle (eg. giving half in November and half the following January) it's probably worth doing. But in other cases where there's no way around it and the giver is not likely to exceed the exemption, just file the form and forget about it.

PS I like your soup!
Just to be clear. If you file a gift tax form, you don’t give up the exclusion to which you are otherwise entitled. In the case of the OPs friend, when Dad files his gift tax form for the $50,000 gift, it will use up $35,000 of Dad’s lifetime exemption. The only way to restructure such a transaction is to delay part of the gift to the next tax year or have Dad’s spouse make part of the gift and have part of it received by the friend’s fiancé. If Dad plans to make a $50,000 gift every year to his single son, there may be no way to restructure to avoid filing a gift tax return.
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Re: A young friend made a tax mistake - can it be undone?

Post by fyre4ce »

SuzBanyan wrote: Fri Jun 11, 2021 2:53 pm Just to be clear. If you file a gift tax form, you don’t give up the exclusion to which you are otherwise entitled. In the case of the OPs friend, when Dad files his gift tax form for the $50,000 gift, it will use up $35,000 of Dad’s lifetime exemption. The only way to restructure such a transaction is to delay part of the gift to the next tax year or have Dad’s spouse make part of the gift and have part of it received by the friend’s fiancé. If Dad plans to make a $50,000 gift every year to his single son, there may be no way to restructure to avoid filing a gift tax return.
Yes, agreed. Some gifts are easy to restructure to avoid gift tax, some are not. The ones that are, I say do it. The ones that aren't, don't worry about it unless you're likely to be over the lifetime exemption. In that case, work it into your overall estate planning.
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Re: A young friend made a tax mistake - can it be undone?

Post by LittleMaggieMae »

fyre4ce wrote: Fri Jun 11, 2021 3:14 pm
SuzBanyan wrote: Fri Jun 11, 2021 2:53 pm Just to be clear. If you file a gift tax form, you don’t give up the exclusion to which you are otherwise entitled. In the case of the OPs friend, when Dad files his gift tax form for the $50,000 gift, it will use up $35,000 of Dad’s lifetime exemption. The only way to restructure such a transaction is to delay part of the gift to the next tax year or have Dad’s spouse make part of the gift and have part of it received by the friend’s fiancé. If Dad plans to make a $50,000 gift every year to his single son, there may be no way to restructure to avoid filing a gift tax return.
Yes, agreed. Some gifts are easy to restructure to avoid gift tax, some are not. The ones that are, I say do it. The ones that aren't, don't worry about it unless you're likely to be over the lifetime exemption. In that case, work it into your overall estate planning.

This all makes it sound like Dad (or someone) will be paying a tax on some of the 50K gift.... but there isn't any tax (unless this 50K pushes Dad's gifts to date over the 11 million dollar mark, right?) Perhaps it's the semantics and how people (aka me) fill in the blanks when they hear "filing a gift tax return" that might have made the OP (and OK me at this point) think his friend would have to pay tax on the 50K gift??

UPDATED: I've re-read the two responses several times and it's sunk in. I'm just restating the now obvious in LittleMaggieMae speak. :)
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Re: A young friend made a tax mistake - can it be undone?

Post by fyre4ce »

LittleMaggieMae wrote: Fri Jun 11, 2021 4:24 pm This all makes it sound like Dad (or someone) will be paying a tax on some of the 50K gift.... but there isn't any tax (unless this 50K pushes Dad's gifts to date over the 11 million dollar mark, right?) Perhaps it's the semantics and how people (aka me) fill in the blanks when they hear "filing a gift tax return" that might have made the OP (and OK me at this point) think his friend would have to pay tax on the 50K gift??

UPDATED: I've re-read the two responses several times and it's sunk in. I'm just restating the now obvious in LittleMaggieMae speak. :)
Correct. To be clear for anyone reading:
  • Gifts are not taxable to the recipient, and aren't income tax-deductible to the giver
  • Gifts to a person in excess of the annual exclusion (currently $15,000) require the filing of a gift tax form by the giver for the amount in excess
  • There is no immediate "gift tax" due. The excess gift amount gets subtracted from the giver's lifetime estate tax exclusion (currently $11.7M, and portable to your spouse, so $23.4M for a married couple).
  • When the giver dies, their estate will owe estate tax on the net value of their estate over whatever the statutory lifetime exclusion is at that time, minus the combined lifetime total of any gifts in excess of the annual exclusion
So, as I said, it won't make a difference for most people. But, it is a minor hassle, and will affect a small percentage of Bogleheads, possibly a larger percentage if the lifetime exclusion drops in the future. If you want to give your kid $400k to put down for a home purchase, just do it and file the form. But if you want to give them $25k to buy a new car as a Christmas present, give them $15k in December and $10k in January.
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