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I have a question and need some advice from FW gurus.

A few months back I did a AOR and gifted my parents about $30K to help them buy a house. I am aware that "One can give up to $12,000 per person per year, tax-free". However, I have following two questions:

1. My parents are in India. Would I still be able to claim Tax deductions on the amount even if they are not here. I have bank records to show that I transferred the money to them.

2. Can I claim $24K deductions - $12K each for my mother and father?

Finally, can I use softwares like TaxAct for claiming these deductions or is it recommended I use a Tax attorney.

Thanks for your help in advance?

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kogerk said: I have a question and need some advice from FW gurus.

A few months back I did a AOR and gifted my parents about $30K to help them buy a house. I am aware that "One can give up to $12,000 per person per year, tax-free". However, I have following two questions:

1. My parents are in India. Would I still be able to claim Tax deductions on the amount even if they are not here. I have bank records to show that I transferred the money to them.

2. Can I claim $24K deductions - $12K each for my mother and father?

Finally, can I use softwares like TaxAct for claiming these deductions or is it recommended I use a Tax attorney.

Thanks for your help in advance?
You are sooo off on your understanding of this. The Gift Tax is an extra tax you pay if you exceed the limits, you cannot deduct the gift.

The $12k to each is fine, you dont need to do anything regarding it (and again, you CANNOT deduct it on your income taxes). You'll have to file another form (I dont recall the form number) for the remaining $6k, since it exceeds the annual amount and needs to be deducted from the lifetime limit.

kogerk said: I have a question and need some advice from FW gurus.

A few months back I did a AOR and gifted my parents about $30K to help them buy a house. I am aware that "One can give up to $12,000 per person per year, tax-free". However, I have following two questions:

1. My parents are in India. Would I still be able to claim Tax deductions on the amount even if they are not here. I have bank records to show that I transferred the money to them.

2. Can I claim $24K deductions - $12K each for my mother and father?

Finally, can I use softwares like TaxAct for claiming these deductions or is it recommended I use a Tax attorney.

Thanks for your help in advance?

Judging from the way you have phrased your post, I think maybe you are confusing two different taxes.

First, there is the income tax. Income taxes are reported on Form 1040. Your gift to your parents has nothing to do with your income taxes. The only kind of deduction you can claim for a gift on your income tax is a gift to a charity or government agency. You will neither report your gift on your income tax return nor claim any kind of a deduction for this gift.

Second, there is the gift tax. This is reported on Form 709. This is entirely separate from Form 1040. You may claim an exclusion for the first $12,000 of gifts to any individual in a given tax year on Form 709. After you've used up the $12,000 annual exclusion, you have a $1 million lifetime exclusion. But note that any part of the lifetime gift tax exclusion you use also uses up part of your estate tax exclusion (that is, it reduces the amount you may leave to your heirs tax-free on your death).

You must file Form 709 in any year when you make a gift exceeding $12,000 to any individual. (This is going up to $13,000 in 2009.)

As far as I know, TurboTax and Taxact and similar programs only work for income tax, not gift tax. Given a simple gift of cash, I find it highly unlikely you will need a tax attorney. (The fees for a tax attorney will probably be more than your gift.) Try printing Form 709 from the IRS web site and filling it out yourself. It is really not that hard. If you are still baffled, consult a tax pro such as an Enrolled Agent or a tax accountant.

Search the IRS website (www.irs.gov) for "Publication 950" - Introduction to Estate and Gift Taxes. It explains (in IRS "legaleese speak") what gldpurd said and then some.

Thanks a bunch for the clarifications and sorry for being so dumb.

kogerk said: A few months back I did a AOR and gifted my parents about $30K to help them buy a house.
You do realize you have to pay back the AOR?

Why does this smell funny to me...

maybe he plans to roll it forward forever, at zero interest, like the US.

kogerk said: Thanks a bunch for the clarifications and sorry for being so dumb.

I wouldn't bother filing anything.

If you want a rationale for that, call the 30k a loan, partly forgiven in 2008 and the rest in 2009.

Could he not claim this as a loan to his parents at 0% and in a couple of years write off the loan as a loss?

Usually when you write off the loan as a loss, it's a tax gain on the parents. But since they are not in the US and are not filing US taxes, it doesn't matter.

There's no reason why this needs to be treated as a gift.

Thoughts?

Update:
1) For a bad debt, you must show that there was an intention at the time of the transaction to make a loan and not a gift.
2) You must establish that you have taken reasonable steps to collect the debt and the debt is worthless. It is not necessary to go to court if you can show that a judgment from the court would be uncollectible.
3) A nonbusiness bad debt is reported as a short–term capital loss in Part 1 on Form 1040, Schedule D (PDF). <-- Awesome!

http://www.irs.gov/taxtopics/tc453.html

Topic 453 - Bad Debt Deduction

If someone owes you money that you cannot collect, you may have a bad debt. For a discussion of what constitutes a valid debt, refer to Publication 550, Investment Income and Expenses, and Publication 535, Business Expense. To deduct a bad debt, you must have previously included the amount in your income or loaned out your cash. If you are a cash basis taxpayer, as most individuals are, you may not take a bad debt deduction for income you expected to receive but did not because the amount was never included in your income. For a bad debt, you must show that there was an intention at the time of the transaction to make a loan and not a gift.

There are two kinds of bad debts – business and nonbusiness. A business bad debt, generally, is one that comes from operating your trade or business. A business deducts its bad debts from gross income when figuring its taxable income. Business bad debts may be deducted in part or in full.

All other bad debts are nonbusiness. Nonbusiness bad debts must be totally worthless to be deductible. You cannot deduct a partially worthless nonbusiness bad debt. You must establish that you have taken reasonable steps to collect the debt and the debt is worthless. It is not necessary to go to court if you can show that a judgment from the court would be uncollectible. You may take the deduction only in the year the debt becomes worthless. A debt becomes worthless when the surrounding facts and circumstances indicate there is no longer any chance the amount owed will be paid. You do not have to wait until a debt is due to determine whether it is worthless.

A nonbusiness bad debt is reported as a short–term capital loss in Part 1 on Form 1040, Schedule D (PDF). It would be subject to the capital loss limitations. A nonbusiness bad debt deduction requires a separate detailed statement attached to your return.

For more information on nonbusiness bad debts, refer to Publication 550, Investment Income and Expenses. For more information on business bad debts, refer to Publication 535, Business Expenses.

Mine was only a little lie and I'd probably never have to defend it, as nothing was ever reported in the first place. Your's would be several big lies and you might well have to defend them.

I really wouldn't do that.

tazzy531 said: Could he not claim this as a loan to his parents at 0% and in a couple of years write off the loan as a loss?...Better yet - assert that the $6,000 ($30,000 - $24,000) was a loan and then next year make it a gift, including interest.



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