Q:

Subject: Money for Car

 

Kerry, We have a grandson turning 16 next month and we want to help him get a car. Is there any way to give his Dad the money we want to spend and get a tax deduction? We do not want any ownership in the car but we have committed to help our son with the purchase of this car. We plan to give $12,000.00 as a gift to make this happen. I believe you told me at one time the limit was $10,000.00. If I have my facts correct we would have to make two gifts, one to our son and the other to his wife. If I have made myself clear please reply if not maybe we should talk.

Thanks for your help,

A:

It must have been a while since we last discussed the tax rules regarding gifting because the annual tax free limit hasn't been $10,000 for several years now.  It was increased to $11,000 a number of years ago, and is now at $12,000.

I have some basic info on Gift Taxes on my website.  

Basically, you and your wife can each gift your son, grandson, or anyone, up to $12,000 during each calendar year without having to file any gift tax returns or use up any of your one million dollar per person lifetime gifting exclusion. 

However, the way gifts work for income tax purposes is that they are not considered taxable income to the recipient, nor are they deductible by the giver on his/her income tax return.  In taxes, there has to be a sort of balance between deductions and income.  In other words, the only way for you to claim an income tax deduction would be for your grandson to claim the same amount as taxable income.  If the recipient isn't willing to pick it up as taxable income, the giver can't claim an income tax deduction.

The Gift Tax is actually part of the Estate (aka Inheritance, aka Death) Tax system because one of its main benefits is to reduce the size of a person's estate, ideally bringing it down below the tax free threshold.

One other clarification of a common misconception surrounding gifts of this nature.  They can only come from humans and be given to humans. Corporations and other artificial entities are not subject to estate or gift taxes, so they can't make the kind of large gifts you are contemplating.  Thus, any gifts would have to be made from your personal accounts and not out of your corporation.

I hope this isn't too confusing.  Let us know if you would like to set up a phone appointment to discuss this in more detail or explore other options.

Kerry

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/29/2007 11:49:00 AM Send this post: