Give and Take? Cash Gift Giving Doesn't Have to Trigger Tax Hit

Am I subject to taxes if I receive $20,000 from my father to pay off a college tuition loan? He does not want to pay the loan institution directly in order to curb his tax burden. Anything I can do to minimize the taxes? My income is only $30,000 per year so any amount of tax will be a burden.

-- Nan Cottril

Nan,

Your question is a great last-minute reminder for people attempting to give away some money during these last few days of 2000.

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In most instances, the recipient of a gift does not owe taxes. It's the gift-giver who may have tax concerns.

According to the gift tax rules, you can give up to $10,000 a year to any one person with no tax implications to anyone. Married people can give up to $20,000 to a single person in a single year.

This $10,000 does not cut into your lifetime unified gift tax credit of $675,000. (While that number will stay the same in 2001, it gradually will increase to $1 million by 2006.) Any gift over $10,000 will. So if a single person gives you $12,000, the extra $2,000 will cut into his lifetime exclusion. If he were married, he could split the gift with his spouse, and it wouldn't have to count against their lifetime exclusion.

If a gift does cut into the lifetime exclusion, the person will have to file a gift tax return, Form 709 -- U.S. Gift Tax Return for the amount over $10,000. This form helps the Internal Revenue Service keep a cumulative record of those gifted amounts above $10,000 so your estate will know how much of an exclusion it can qualify for after your death.

The only time the recipient of the gift may be subject to tax is when the person who files a gift tax return doesn't pay the taxes owed. The IRS may hunt the recipient down instead and demand payment. Otherwise, there are no tax consequences to recipients of gifts nor is the receipt of a gift a taxable event.

So if your father gives you $20,000 to pay your college loan, the IRS will consider it a gift to you. Based on the rules, he can give you $10,000 without consequences. The additional $10,000 will cut into his lifetime exclusion.

But thanks to a quirk in the rules, your father would've been better off paying your tuition bill directly to your college, says Maggie Doedtman, manager of tax training at H&R Block in Kansas City, Mo. As long as a tuition payment is made on behalf of an individual and paid directly to the educational organization, there is no limit on the payment amount, according to RIA, an information provider to tax professionals. In addition, there are no gift tax issues so the payment would not cut into his $675,000 lifetime exclusion.

These gift-tax-free payments can be made on behalf of both full-time and part-time students but are limited to direct tuition costs. Dormitory fees, books, supplies, etc., do not count.

So if it's possible, it might be worth having your father pay your college directly in the future.

But this gift-tax exclusion does not apply to loan institutions, says Doedtman. In that case, the $20,000 becomes a gift to you.

So whether your father gives you $20,000 or pays your loan institution directly, the IRS still will consider it a cash gift to you, says Doedtman

To avoid this tax hit, your dad can choose one of two options. He can send $10,000 to the loan institution today, which will count as his 2000 gift to you. Then he can send another $10,000 next week. But that will count as his 2001 gift. He technically cannot give you any more large amounts of money without having to file a gift tax return.

Another option is to just give you the money directly, again splitting the $20,000 between 2000 and 2001. In this instance though, you must deposit the check before Dec. 31 or it won't count for 2000.

So consider this a big heads-up to folks who want to get some money out of their estates quickly before year's end. If you know someone in college, feel free to pay some of their tuition bill. Or cut that person a check -- just drag him or her to the bank to ensure that it is cashed before Dec. 31.

Happy giving!

Selling Securities? You Have Until Friday!

Do you still have time to sell your positions and get some tax benefit for them for 2000? There seems to be some confusion over the answer to this question and because I've written about it numerous times, I feel the need to weigh in.

There are two dates you need to be aware of -- the trade date and the settlement date. The trade date is the day on which the transaction occurs. On the settlement date, either money or securities are exchanged. The settlement date usually is around three days after the trade date.

If you are long a stock and you sell it, the trade date is the day that counts for tax purposes. Uncle Sam doesn't care that money or securities haven't changed hands yet. So that means any trades you make between now and the close of business on Friday will count on your 2000 tax return. The same goes for options trades -- the trade date generally is the day that counts for tax purposes.

If, on the other hand, you make a short sale, the settlement date is used for tax purposes, since you really can't determine how much you've gained (or lost) until you return the stock to your broker. See this previous column for more details.

There, it's settled. (Ha!) Now get out there and trade. You don't have much time.

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