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Posted by Seth on May 1, 2008, 1:35 pm
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I'm just wondering what would happen in this case.
A parent wants to give as much as possible to an adult child, up to
the gift limit. On January 1st, the parent gives the child the limit
($12,000).
In March, the child has expensive dental work (say, $5,000). The
parent pays the dentist the $5,000. That doesn't count, because it's
paid directly to the service provider, right?
Then the child's dental insurance company reimburses him $4,000.
What is the tax effect? (Note that the parent might not even know
that the child has dental insurance.)
Seth
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Posted by Stuart Bronstein on May 1, 2008, 1:47 pm
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sethb@panix.com (Seth) wrote:
> A parent wants to give as much as possible to an adult child, up to
> the gift limit. On January 1st, the parent gives the child the limit
> ($12,000).
>
> In March, the child has expensive dental work (say, $5,000). The
> parent pays the dentist the $5,000. That doesn't count, because it's
> paid directly to the service provider, right?
No, not right. I think there is a special rule for college tuition,
but aside from that it's generally not true.
Depending on the age and financial status of the child it might be
considered support rather than a gift.
> Then the child's dental insurance company reimburses him $4,000.
>
> What is the tax effect? (Note that the parent might not even know
> that the child has dental insurance.)
The parent should file the gift tax return if it is a gift rather than
support. That's it.
Stu
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Posted by removeps-groups@yahoo.com on May 1, 2008, 6:45 pm
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> No, not right. I think there is a special rule for college tuition,
> but aside from that it's generally not true.
http://www.irs.gov/newsroom/article/0,,id=107815,00.html
<Quote>
There are some exceptions to the tax rules on gifts. The following
gifts generally are not taxable and do not count against the annual
limit:
Tuition or Medical Expenses that you pay directly to an educational or
medical institution for someone's benefit
</Quote>
The child should return the 4k to the parent. Since the child is an
intermediary of the transfer, there is no tax. I cannot find anyplace
in the code to support this, but it sounds right. Then parent could
then return the 4k to the child and file a gift tax return for the 4k.
The cleanest thing is to have the insurance company make the 4k check
out to the parent.
If the child does not return the 4k, then the 4k is like a recovery
item (ie, like recovery of a deduction in a prior year) so would have
to be recorded as Other Income.
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<< that may be imposed upon the taxpayer. >>
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Posted by D. Stussy on May 2, 2008, 3:37 am
Please log in for more thread options > > No, not right. I think there is a special rule for college tuition,
> > but aside from that it's generally not true.
>
> http://www.irs.gov/newsroom/article/0,,id=107815,00.html
>
> <Quote>
> There are some exceptions to the tax rules on gifts. The following
> gifts generally are not taxable and do not count against the annual
> limit:
>
> Tuition or Medical Expenses that you pay directly to an educational or
> medical institution for someone's benefit
> </Quote>
>
> The child should return the 4k to the parent. Since the child is an
> intermediary of the transfer, there is no tax. I cannot find anyplace
> in the code to support this, but it sounds right. Then parent could
> then return the 4k to the child and file a gift tax return for the 4k.
>
> The cleanest thing is to have the insurance company make the 4k check
> out to the parent.
>
> If the child does not return the 4k, then the 4k is like a recovery
> item (ie, like recovery of a deduction in a prior year) so would have
> to be recorded as Other Income.
How is it a recovery item?
1) The parent, who paid the expense and took the deduction, didn't receive
the recovery.
2) The child, who took no deduction, does not log the reimbursement as a
recovery since there's no expense incurred by him to recover.
Related issues:
The parent should have deducted only $1k - as the amount not compensated by
insurance. The other $4k is neither income-tax-deductible nor a gift. How
is the child filing the insurance claim for $5k (to get the $4k
reimbursement) if he didn't pay the expense in the first place?
The child may have other income of $1k - but NOT as a recovery item (see
above). It's not an excess gift because the parent has no control over the
child's insurance company (or choice thereof).
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Posted by Seth on May 2, 2008, 2:02 pm
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>The parent should have deducted only $1k - as the amount not compensated by
>insurance.
The parent didn't deduct anything. His goal is to transfer money to
his child, not to reduce his income tax. Nor is the child his
dependent, and his total medical is way under the 7.5% haircut.
> The other $4k is neither income-tax-deductible nor a gift. How
>is the child filing the insurance claim for $5k (to get the $4k
>reimbursement) if he didn't pay the expense in the first place?
The dentist filed the insurance paperwork.
Seth
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<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
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<< Copyright (2007) - All rights reserved. >>
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