Gift exemption

[Rick9464]

we file jointly.  we plan to give a gift to our daughter in a large sum but over 3-5 years.  We are taking a distribution from a IRA so we take a gift amount and add in additional amount to cover taxes.  What I want to know is whether or not i am required to file form 709.  Since we are spacing out the amount over time and not exceeding joint allowance which for 2022 is 32000, I am of the opinion that I dont need to file the form despite taking more money out to cover the taxes.  Say for example, the gift was 25K but we took another 15K as part of the IRA Distribution for a total distribution of $40K.  Only 25K of that amount was the gift we gave this past year.

I do know that if I had exceeded the 32K  on a joint basis, I would need to file it.  However in this case our gift portion is less than the exclusion even though we had to add to our distribution to cover taxes.

[MaryK4]

You must file a gift tax return to split gifts with your spouse (regardless of their amount).  If you elect to gift splitting with your spouse, each individual is responsible to file a Form 709.  (Spouses may not file a joint gift tax return.)

[Rick9464]

Thank you Mary for your response.  Let me be more specific on the situation so you can help clarify.

1.  Wifes intention was to assist her daughter and future son in law in buying a house by using money from her 401K.  Husband has a brokerage line of credit against his account which allows her to spread out the necessary amount for the gift.  Lets say its 100K and the plan is to pay down the debt over 5 years.

2.  Paid 28.5K Principal and Interest (which would be the total gift amount in my mind) , $11.5 Fed taxes and $2800 in state taxes on the 28.5.  So the total distribution from 401K was just over 41K.

3. '22 gift exclusion limit is $16k/person.  So she gave her daughter and future son in law each a estimated gift of $14250 (under the $16K limit).  Per tax tip on "tax guidelines about gifting" on 12/1/22 in Turbotax, it states the law allows you to make an unlimited number of tax-free gifts as long as no one receives more than the $16K limit.

So because she gifted to each of them a gift under 16K in principal and interest, we dont think it is required that a form 709 is necessary.  DO YOU AGREE?

We also dont think the Federal and state taxes paid to give that gift amount is part of the gift but rather the taxes we must pay on the distribution.  Only the principal and interest paid in '22, we believe is the actual gift amount we are working with.  DO YOU AGREE?

Hope this clarifies my question and what I think our responsibility is for 2022.  Please let us know your opinion.

[fanfare]

the amount of your gift has no relation to the amount you take out of your 401k, for tax purposes or other wise.

I hope this is easily seen.

@Rick9464 

[Opus 17]

The amount of the gift is what is actually given.  The source of the money is not relevant, and if you withdrew extra money from the IRA for any purpose, that also doesn't matter.  Just what you actually gave.

[VolvoGirl]

Right.  First of all, Any 401K and IRA distributions are separate from the gifts.    What you did with the money doesn't matter or figure into it.  You owe tax on the withdrawal and a 10% Early Withdrawal Penalty if you are under 59 1/2. 

Then for the gifts, your wife and you both can give each of them up to the max without filing the gift tax return 709.  So that doubles it even more.

She can give 16,000 to each of them and so can you.  16,000 x 4 = 64,000.

[Rick9464]

I mentioned her 401K because that is how she is paying my line of credit back.  In my mind, the taxes do not count but the actual gift amount would be the principal and interest.  In reality, I loaned her the money for the kids and she is paying me back over 5 years.  ARE YOU SAYING THAT BECAUSE WE ARE DOING THIS BETWEEN US ITS NOT A GIFT?  SINCE I TOOK OUT THE LINE OF CREDIT FOR THE KIDS, DOES THIS MEAN IT DOES NOT CONSTITUTE THE DEFINITION OF A GIFT?

[VolvoGirl]

You are way over thinking this.  And now you complicated it by explaining about a loan you got.  Didn't catch that before.  What you do between you and your wife are not gifts to each other and don't factor in.  I thought you were talking about giving your daughter a gift for a house loan they have.  

[Opus 17]

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@Rick9464 wrote:

I mentioned her 401K because that is how she is paying my line of credit back.  In my mind, the taxes do not count but the actual gift amount would be the principal and interest.  In reality, I loaned her the money for the kids and she is paying me back over 5 years.  ARE YOU SAYING THAT BECAUSE WE ARE DOING THIS BETWEEN US ITS NOT A GIFT?  SINCE I TOOK OUT THE LINE OF CREDIT FOR THE KIDS, DOES THIS MEAN IT DOES NOT CONSTITUTE THE DEFINITION OF A GIFT?

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Not sure why you are confused.

(First to clarify, if the daughter is your step-child, they are legally the same as a biological child for income tax purposes.  Not sure if that's what's going on here, just in case.)

You and your wife can each give your daughter and son-in-law $16,000 per year without triggering the reporting requirement.  That's 4 gifts totally $64,000.  If you want to give that much.  It doesn't matter where the money comes from, once the money is in your bank account, it's just "money", it doesn't have a name tag saying where it came from.  (The fancy word is "fungible").

Your wife can give you an unlimited amount of money each year without reporting it because that's a thing for spouses.

How you get the money is not relevant to the gift transaction, whether it is wages, savings, cashing out a retirement account, or finding it in the sofa cushions.  If your wife withdraws money from a 401k plan for any reason, she pays the tax on the amount withdrawn.  That is completely separate from how you dispose of the money afterwards, as a gift or to buy a car or anything else.

So in 2022, your wife gave $14K to each person.  That's fine, and it's not reportable.  In 2023, she could give up to $16K to each person, and you could gift another $16K to each person, if you wanted to, for a total of $64K.  The gift limit is per person, and doesn't depend on any family or other relationship, it's just per person whoever they are.  

If you and your wife feel it is necessary or appropriate for her to refill your broker account by cashing in the 401k, that's up to the two of you and how you want to run your finances.  She pays the tax on whatever she withdraws. 

[Rick9464]

Maybe I am overthinking it.  Bottom line is my wife is gifting money to help buy the house.  To do that I loaned her money from my portfolio line of credit I have.  She is paying me back over 5 years.  We thought that the principal amount used to pay me back would be considered the gift (not the tax distribution portion).  She is paying me back from her 401K.  By doing it over time, she is able to spread it out.  As well we thought we would stay within the exemption limits.  In the end, the loan I gave to her was given to her daughter for a down-payment, but she pays me back from her funds over time.  Are you saying that because we transacted as a loan between us, no gift has taken place (even though the money was used for the down payment)

[VolvoGirl]

My head is swimming try to keep that straight.  The gift is only the amount you or your wife actually gave your daughter.  Nothing else matters.