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What are the various ways of savings to avoid income tax?

How do I avoid paying income tax on gifted money for education?

  • My mother is cashing in stock and will be gifting me roughly $38,000 to pay for flight school. She will not pay capital gains taxes on the stock. She will be depositing the check into her checking account and then transferring the money into my savings account. I will be withdrawing portions of the money to pay for flight school as needed every few weeks. My question is this: how do we go about moving this money around between accounts without it being recognized as income since the money is being used strictly for education? Again, we are both trying to avoid paying income tax on the money since it will hit both of our accounts.

  • Answer:

    A gift of $38K to one person in one year must be reported on a gift tax return, but unless she has given large gifts before there isn't likely to be a gift tax due.

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The purpose of the gift doesn't matter. No gifts are taxable with federal income tax. However, the donor (your mother) must file a Federal Gift Tax Return to report the gift. The first $13,000 is excluded in 2010, and the return is due next April 15. If your mother is married (not necessarily to your father), and the source of the property is joint or community property, they should each give you gifts, increasing the exclusion to $26,000. If you're not going to need the whole $38,000 in 2010, they could avoid any tax liability by each giving $13,000 this year, and your mother giving the remaining $12,000 (up to $13,000) next year. If your mother lives in Tennessee or Connecticut, there may be some state gift tax liability. The last I heard, those were the only states left with a gift tax; all other states have repealled it.

Chuck

If your mother cashes in stock, she will have a sale. Unless her cost basis is more than what she sells it for, she will be paying taxes on it. The fact that she wants to make a gift of it is nice, but doesn't change that. As for the education exclusion for gifts (meaning she woudln't have a $13000 cap before paying gift tax), she must pay the money directly to the flight school for tuition.

Quick Answers

Cash gifts are not taxable income to the recipient. They MAY have a tax impact for the gifter.

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