Skip to Main Content

Helping dad reduce his taxes

At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict , this post may contain references to products from our partners. Here’s an explanation for

Helping dad reduce his taxes

Dear Tax Talk:
My father pays an unreal amount in quarterly taxes. He is 73, retired, but still draws dividends from fast-food restaurants plus his Social Security. What is the tax law about monetary gifts to children without paying taxes on that income? What is the annual amount? Are grandchildren also an eligible deduction? Please help, as his accountant does not seem to care. Thank you.

Dear Leslye:
Oh, the plight of the rich, but at least your father has a caring daughter.

There’s seems to be a misunderstanding with gifts to family members. These gifts are never deductible, neither is the gift income taxable to the recipient. Instead, the law limits the amount a person can give to any one person so that you can’t give away all your assets without a tax consequence.

Since an individual’s estate pays estate taxes (scheduled to be repealed in 2010), if he gave away all his assets during his life, it would defeat the purpose of the estate tax. Therefore, you have annual gift limits. If you exceed the annual limits, you have a gift tax responsibility; at a minimum, you have to report the gifts, and if the gifts are large enough, your father may have to pay a tax. The gift tax and the estate tax work together and only actually result in paying tax when you exceed what is referred to as the unified credit.

The annual limit for nonreportable gifts is now $11,000 (up from the historical $10,000). That means your dad can give away annually up to $11,000 to each of his relatives (including grandchildren) or friends and not have to file a gift tax return. If he gives away more than this, he’ll file a gift tax return and dig into his unified credit. The unified credit results in the first million dollars in gifts being exempt from gift tax. Although the unified credit for estate tax increases over the next few years until the repeal of the estate tax, the gift credit is not scheduled to increase.

Since your concern is to reduce your father’s taxes, your father needs to give away income-producing property such as the fast-food stocks to get his taxes down. Since all this involves good planning, you really need to get a caring CPA involved to devise an overall plan.