Gift tax and college aid

Parents Forum
1

Hi experts!

I live in a community property state, My ex and I separated in 2015. In 2016 (while still married to me) his mom immigrated to the US and he made a gift from community property to her to help her settle (the amount exceeds the annual tax exemption limit). He prepaid her rent for 2016 and 2017 to make sure she has a place to live. I didn’t know about it until now. I’m thinking it will show up on my 2016 tax return and colleges will question why someone made a gift just before filing non-custodial CSS profile. Am I mistaken? Any thoughts on this subject? Can we file gift tax separately?

2

I don’t think they care about gifts made before filing (they don’t penalize you or anything). I guess they could question whether it was a bona fide gift, or you were intending to get the money back, but if you explain the reason for it, you should be fine.

3

It is unlikely your husband paid a gift tax on the amount he gave to his mother. If he gave her over $14k (and if still married $14k from you too) he’d have to file a form so that a record can be kept for when he dies. If at the time of death he’s given her more than the lifetime limit (millions, like $5 million) THEN his estate would pay a gift tax.

I hope the rent for 2 years wasn’t $5million.

The colleges won’t know about the gift. However, they will expect that amount to be an asset that could have been used for college if it is reflected in income and assets. If it was just a lump sum given in 2016, I doubt it would even come up on the CSS unless it was an early withdrawal from a 401k or IRA.

4

If he gifted her less than $28K/year for each of those years, it could have been a gift from you and him and been under the $14K/person gift.

No one will be coming after YOU if he gave a gift of living expenses to his mom for two years, even if it was more than $28K/year for 2 years.

5

So glad the gift tax myth was addressed here. So many people think there is a $14k limit on gifts and after that you are taxed. You just have to report the amount over $14k on a form so they can track it until it, ahem, meets $5 million over a lifetime. I wish!

6

This thread has been helpful to me- one more question about gift tax if anyone can weigh in-
I know money transferred for educational and medical expenses doesn’t count towards the 14/28K but how about money for room and board while child is at college?

Son is moving off campus and wants to open a credit card to pay rent food to establish credit. Asked us to pay rent food money into his bank acct each month and he will pay the credit card comp directly- will this money I give him be counted towards the 14k and if it goes over I would need to file a form?

7

Is he still your dependent? It is not a gift at all if he is as you are just paying to support him, just like you did when he slept down the hall.

I think the room and board also counts as ‘educational’ for this purpose. The IRS doesn’t count room and board the same in all situations. Taxable if a scholarship, allowed as 529 expense, okay to offset the penalty for early withdrawal or an IRA - all’s not fair (or sensible) in IRS-Land.

8

In general, room and board payments are not exempt from gift tax accounting, unlike tuition. That is important for grandparents or uncles/aunts who help with college to know. Payments for room and board would be considered gifts either to the student or to the student’s parents (if they have an obligation to support the student, and the relative’s payments reduce that support obligation). It is also important to know that to take advantage of the tuition exclusion, the person providing the funds must pay them directly to the college. If a student’s grandparents give the student’s parents, or the student him- or herself, money to pay for the student’s tuition, that is a gift that has to be accounted for if all gifts the same year to the same person(s) exceed the annual exclusion.

In the case of parents paying paying room and board costs, however, it may or may not be a “gift” for gift tax purposes. In some states, parents have an obligation to support their children while they remain full-time students, and in other states such an obligation may arise pursuant to a divorce decree or an agreement between non-divorced parents. Room and board are core support obligations. So financing room and board, if it satisfies a legal support obligation, would not be considered an accountable gift, and would not count towards the annual exclusion.

As a practical matter, I have never heard of the IRS going after parents for supporting their college students, even if there is no technical support obligation in their state. Doing so would (a) be very unpopular, politically and socially, (b) force a whole lot of people who would never expect to pay a cent of gift tax or estate tax to file gift tax returns, and © raise serious equity considerations because of state-to-state differences in precise support obligations.

Also, to answer the OP’s question: Not only can you and your husband file separate gift tax returns while you are married, you must file separate gift tax returns if both of you are required to file. There is no such thing as a joint gift tax return. What there is, is an election whereby a married couple can choose to treat all gifts made by one of them as gifts made by both of them in equal shares, but both members of the couple must agree to that specifically, and if they do that, then both have to file their separate gift tax returns even if only one of them actually made any gifts over the annual exclusion limit for both. One advantage of making that election, however, is that it effectively doubles the annual exclusion for a gift to one person. If your then-husband gave his mother $25,000, that would mean an $11,000 gift that had to be reported. But if you and your then-husband elect to split your gifts that year, and you had not separately given anything to your ex-mother-in-law, then the entire $25,000 would be covered by your combined $28,000 annual exclusion. That alone wouldn’t have any negative effect on you as long as you hadn’t given your ex-mother-in-law more than $3,000 yourself.

9

@JHS —I am in awe of your knowledge!

10

I am more worried about the OP’s divorce situation… just in case there have been other dispersals of community property which she was unaware of during her marriage…

Is your lawyer on top of things?

11

As a practical matter, we have never paid more in a year for either child while in college than the $28,000 per year for room, board and incidentals anyway.

I thought the gift tax is per giver per recipient, so I can give $14K to kiddo, H can give $14K to kiddo, aunt can also give kiddo 14k in one year. Those same 3 folks can also give equal gifts to older (or younger) kid. That is always how I’ve interpreted it and how we were taught if in law school.

12

No you can give any amount to anyone with no tax unless it reaches $5million in a lifetime.

You do report anything over $14k so they can keep track of the accumulation toward $5million but there is no tax.

This misunderstanding is limiting gifts unnecessarily, all over our great country!

13

Right. Each of you has an inflation-indexed lifetime exemption, which is currently up to $5,490,000 per person. You can give away that much in “taxable gifts” during your lifetime, without paying any gift tax, and to the extent you don’t give it away during your life, your estate avoids federal estate tax on whatever is left over of the exemption. For the vast majority of people, of course, that means they never pay any federal gift tax or estate tax, even if they have millions of dollars of assets and give it all to their kids. (State taxes are another matter, and hit many more people. But few states tax lifetime gifts.)

Some gifts are nontaxable. As a practical matter, what that means is that they don’t count against the lifetime exemption at all. The important ones there are (a) $14,000 per person per recipient per year (and it doesn’t matter how many recipients for whom you take advantage of this), (b) direct payments of anyone’s educational or health care expenses, and © charitable contributions. There are some rules affecting each of these categories, so if you are doing anything other than writing a check to the donee or the donee’s school or doctor, it would be best to call a tax lawyer or tax accountant.

14

Clearly you have some expertise here, JHS, so I’ll defer to your judgment, but I’m curious about the above statement. Under the Internal Revenue Code, a child under the age of 24 who is a full-time student, maintains his principal residence with the parents (i.e., lives with the parents for more than half the year, with time “temporarily” spent away at school not counting as living away), and receives more than half his support from the parents is considered a “dependent” for tax purposes, and may be claimed as such on the parents’ income taxes. This classification is quite independent of any support obligation under state law. So are you saying that paying room and board for a dependent child could nonetheless be considered a “gift” for gift tax purposes? I would find this quite surprising.

Not that it’s likely to arise in all that many cases. If there are two parents (whether they’re together or not), each can give $14,000 annually free of gift tax reporting requirements. For that matter, a stepparent or even the boyfriend/girlfriend of a biological parent could also give up to $14,000; the exemption isn’t limited to relatives. I’ve never heard of room and board exceeding $28,000 (though other gifts would also count toward the total). But with the rising cost of room and board, it could become an issue for some single parents if your analysis is correct.

If grandparents are helping out, each grandparent can give the student $14,000 annually free of any gift tax implications or reporting obligations. But in addition, if they’re so inclined, each grandparent could also give each parent up to $14,000, and if the parents choose to spend that money on their child’s education, that’s their business (unless, of course, the parents’ support becomes a reportable gift per JHS’s scenario).

15

That’s a good observation, @bclintonk . I can say a few things about that:

– There is less than perfect coordination between the income tax and the estate and gift tax. If you want your mind blown a little, ask an estate planner to explain “intentionally defective grantor trusts” to you. They are trusts that are completely disregarded under the income tax rules, but treated as separate entities under gift tax rules.

– The “dependent” status of twenty-somethings is really a matter of arbitrary legislative grace in giving families a tax break (and allocating personal exemptions between parents and children at the point where some children are fully independent taxpayers and some not). It doesn’t reflect any background expectation that parents will support their twenty-something children.

– I’m sure that someone, somewhere has filed a gift tax return that includes room and board payments for a full-time student child. But I have never seen one. And, in all fairness, if a 22-year-old lives and eats at home, no one thinks the parents need to report the fair rental value of the child’s room and the cost of food as a gift.

Nor have I seen a gift tax return that treated as a reportable gift the cost of taking an adult child (with or without a spouse or significant other, or grandchildren) on a family trip.