Q I am 80 and shall retire very soon. My wife and I are contemplating moving to live with my daughter’s family. We are considering building an addition (such as in-law unit) to her house or moving with her family to a bigger house. Regardless, it will require additional funding that we will provide. Would our contribution be treated by the IRS as a gift?
IRS rules allow the annual tax-free gift to the children up to $24,000 per parents (from both of us). Our contribution toward remodeling or buying another home would be $200,000, which easily exceeds the tax-free gift limit. Will the difference of $176,000 be subject to the tax? If yes, could a family loan be an option?
J.S.
A First, the exclusion is $13,000 this year, so a total of $26,000 from both of you can be excluded from gift-tax reporting.
And you each get a lifetime $1 million exclusion from gift tax, said Kristine Merta, a principal at Lowry Hill, an asset-management firm for wealthy clients. You would file a gift-tax return on the $174,000, but you’d still be below the lifetime maximum.
You can avoid the gift-tax issue by paying the contractor for the addition or by purchasing the home jointly, but these options require some careful thought, Merta said.
First, if you have other potential heirs or your daughter does, this situation could complicate estate plans, she said, so you and your wife should consider discussing your intentions with all of them.
“As long as the parents are upfront and explain the thought process, the kids may not like it, but they typically accept it,” she said.
You can try to “equalize” your estate by giving other assets to other heirs, but even that will involve imprecise estimates of valuations, she said.
You also need to consider how the $200,000 affects your overall wealth. If it represents a large portion, sinking it into a gift to a child could be a difficult issue if you or your wife require medical or nursing care outside the home, she said.
Intrafamily loans have become more common as mortgage lending has tightened, but if you choose this route, document everything correctly, Merta said.
Q I am divorced and was married for 20 years. If my former husband dies, am I entitled to the amount he receives in Social Security? I am now receiving half of what he receives.
L.S.
A Yes, you are. Check out this link for details: http://www.ssa.gov/survivorplan/ifyou3.htm.
Q I started receiving my IRA minimum distributions in 2006 at age 70 1/2. This triggered federal income taxes on my Social Security equal to a full monthly check per year. I feel like I am being penalized for having an IRA.
A.J.
A There are ways to make the best of your tax situation, notes Rande Spiegelman, vice president of financial planning for Charles Schwab.
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This is hindsight, of course, but retirees older than 59 1/2 can consider taking earlier distributions from their IRAs to reduce the minimum distribution requirement down the road, he said.
And you can try to manage your tax bracket so withdrawals above the required minimum won’t throw you into a higher bracket, he said, noting that needed income, if necessary, can come from accounts that don’t trigger income taxes. That’s why it’s important to think about the assets you have in retirement and non-retirement accounts (such as taxable and non-taxable bonds, individual stocks, etc.) and how they’ll be taxed when the money comes out.
“I’d rather have a big IRA and be taxed on Social Security, than pay very little on Social Security and not have enough to make ends meet,” said Spiegelman.
To check out whether your benefits are taxable, see IRS Publication 915 at http://www.irs.gov/pub/irs-pdf/p915.pdf.
Have a retirement question? Write to [email protected], or via mail at Your Money, baiduhai, Room 400, 435 N. Michigan Ave., Chicago, IL 60611.