Q: My husband and I are interested in giving our children some money for the holidays. We figure it’s better to do it now while they need it. But, we’ve heard there is a limit to how much we can give and we don’t understand the tax implications of our gift to our kids or to us.
A: A gift of cash is tax-free to your kids. Keep in mind, if you give appreciated stock, any unrealized capital gain is shifted to them and they’d owe capital gains tax upon the sale of the shares.
In 2023, you can give up to $17,000 (increasing to $18,000 in 2024) to any person without having to report it on your tax return. Now, if you give more than $17,000 to anyone, you will need to file Form 709 to report the amount over the annual gift limit. And, the amount over the limit will count against your current tax-free lifetime gift “allowance” of about $13 million. You can multiply that by two as a married couple.
As you can see, most people don’t have to worry about taxes on gifts; giving or receiving. The only thing is whether or not you need to file a Form 709 to keep track of amounts over the annual gift limit.
Q: We have rental property that loses money each year from a tax perspective. But, when I look at my past tax returns, our rental loss doesn’t seem to show up. If I remember correctly, our tax preparer said it’s because we make too much money. If that’s the case, will we ever benefit from those tax losses?
A: It sounds like you are running into the limit on passive activity losses due to your income level. The tax code loves complexity, but I hope this explanation will simplify it a bit for you.
If your modified adjusted gross income or MAGI is below $100,000, you are allowed to deduct up to $25,000 of your rental losses. But, if your MAGI is above $100,000, $1 of your rental losses get “held in suspense” for every $2 of income above the limit. As you’ll see, by the time your MAGI reaches $150,000, the entire $25,000 passive loss deduction is disallowed and is effectively held in “suspense” for later use.
So, when will you ever get to use those suspended rental losses? When your MAGI dips below $150,000, you’ll get to use some of them. And, regardless of your income, if and when you decide to sell the rental, your suspended losses will be unlocked. So, they are not “lost” losses, they are just suspended deep in your tax return on Form 8582.
Jason P. Tank, CFA, CFP® is the owner of Front Street Wealth Management, a purely fee-only advisory firm in Traverse City. Contact him at (231) 947-3775, by email at [email protected] and at www.FrontStreet.com
