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Posted by Mark Bole on December 13, 2006, 10:57 pm
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Following is an excerpt from a thread on a financial
planning newsgroup, just curious what answers are
forthcoming from the crowd here.
>> Notwithstanding their relationship needs counseling, are
>> there some provisions in the gift tax law I'm missing
>> whereby parental support for a severally handicapped child
>> (which isn't her situation anyway) is not considered a gift
>> for gift tax purposes?
I have been wondering, in general, what is the difference
between a gift and support, and then this question came
along to ask more or less the same thing.
IRS Pub 950 states a gift is when you don't "[expect] to
receive something of at least equal value in return".
Might a specific property (including money) be both a gift
and support in some situations? Whether or not it is
taxable is not what I'm curious about in this context, just
what the definition is.
If a parent supports a minor child, since such support is
usually presumed to be a legal obligation of the parent,
does that mean it is not a gift? If someone supports a
non-disabled adult child or some other relative, then what?
What about supporting someone who is not related at all?
What if you give money to someone, and then he supports
himself with it? A gift, or support, or both?
I made some effort to find this topic in IRS docs or
on-line, and have not been successful... yet it seems a
basic distinction that every tax pro should know. What am I
missing?
-Mark Bole
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Posted by Shyster1040 on December 16, 2006, 8:58 pm
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Yes, there is indeed a big difference between payments for
support of a dependent one is legally obligated to support
under applicable state law and taxable "gifts" for federal
tax purposes.
First, as a statutory matter, under Code Section 2503(e),
payments made directly to a qualified educational
organization for tuition and directly to any person who
provides medical care as defined in Section 213 are not
"gifts" to the beneficiary of such services for purposes of
the federal gift tax.
Second, and more generally, under Section 2503(b)(1), the
first $12,000 (for 2006) of any amounts transferred during
the year for the benefit of another person are excluded from
the term "taxable gifts" even if that transfer really is a
gift in the common sense meaning of the word.
Third, Section 2503(c) provides an exclusion for amounts
transferred for the benefit of a person who is less than 21
years of age provided, inter alia, that the property and the
income therefrom may be expended for the benefit of the
recipient before he reaches the age of 21. There are other
restrictions on transfers under Section 2503(c); however, a
transfer of funds outright that is completely used up in the
year of transfer for the support of the recipient would most
likely qualify.
Fourth, and even more generally, a transfer is not a gift to
the extent that the transferor receives adequate and full
consideration in money or money's worth for the transfer.
Treas. Reg. 25.2512-8. Thus, to the extent that the
transferor has a legally enforceable obligation to support
another person, a transfer to a third party providing
support services to that other person is not a gift.
The key here is that, in general, you must have a legal
obligation under applicable state law to support the person
in order for your payments to support that person to be
treated as payments other than a gift to the person you're
supporting. Under the law of every state (that I know of) a
parent has a legal obligation to support a child under the
age of 18. Thus, payments made by a parent to support a
minor child are not gifts to that child. Further, in a
number of states, a parent may have legally enforceable
support obligations respecting their children that continue
beyond the age of 18; e.g., in some states parents have been
found to have a legal obligation to pay for their children's
college education, thus, a parent residing in one of those
states will not be treated as making a gift to their over-18
child if they pay for college room and board, books and etc
(tuition would be excluded from gifts under Section
2503(e)). Additionally, in many states parents have a
continuing legal obligation to pay for the support of their
disabled adult children, e.g., Pennsylvania; in those
states, payments for support of a disabled adult child are
also not "gifts" for federal gift tax purposes. Lastly, by
virtue of Section 2503(c), you can continue supporting your
adult child until the age of 21 without incurring any
liability for gift tax, so long as the payments you make are
used up for that support during the year when paid (or, at
any rate, prior to the child's turning 21).
Beyond that, however, if you pay support a non-disabled
adult child (or any other person whom you do not have a
state law legal obligation to support), you will generally
be treated as making a gift to that person in the amount of
the support costs you pay.
Of course, there is still the general exclusion from gifts
of up to $12,000 per year (for 2006, the amount is indexed
for inflation, so it rises every few years), so you could
pay up to $12,000 for the support of any person you like
without having those payments treated as a taxable gift to
that person.
Hopefully that gives you a little more guidance. If,
however, you have a more specific scenario in mind that
involves more than $12,000 per year, you should probably
consult a cpa or tax attorney. In all events, what I've
written above is not based on any discrete set of facts, and
shouldn't be relied on without checking the law out
yourself, or with the help of a cpa or attorney to whom you
divulge all of your particular facts (gotta put the CYA
notice in).
<< ======================================================= >>
<< 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 >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>
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