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I have an uncle who has been hiding money from his wife for years by stashing cash in a safe deposit box. He decides to use this money to make a loan to another family member. He doesn't want his wife to know about this. He sends the family member a cashiers check for about $90K. She uses this money to pay off her $60K mortgage, and the plan is for her to give the remaining $30K to another family member to use as a down payment on a house. What are the tax implications of this? Since the source of the funds is not clear (he has been saving it over the years in cash) will the IRS question the source? Are there possible criminal implications if they can't prove the source of the funds? Or is this simply a gift (subject to $1,000,000 lifetime gift tax exemption? If it is a legitimate gift will the receiving family members need to pay income taxes on it? Are there other concerns I haven't identified? What specific type of tax advisor should they seek to help sort this out?
Country/State/Province of question: NY and TX Already Tried: I have done research on gift tax and loans between family members on the internet.
HelloCustomer There is no law against saving cash in a safe deposit box or anywhere else. As far as giving the $90,000 to the family member, it would simply be considered a gift. He does have a lifetime exemption of up to $1 million that he may give in gifts before any tax would be due. But since the gift does exceed the annual exclusion of $13,000, he would need to report the gift by filing Form 709. No gift tax would actually be due unless he had already used up his $1 million lifetime limit. This would simply reduce his remaining balance of gifts he is allowed to give. It is not likely the IRS would question the source of the money, just based on the fact that he filed the Form 709. As long as your uncle has been filing his tax returns and paying taxes on all money he has earned, then saving cash in a safe deposit box is not illegal, and the IRS will have no reason to question it if he has been filing his taxes on his earnings. If this was helpful please press the Accept button. Positive feedback is also appreciated. Thank youCustomer
Merlo - thank you so much for the quick reply. This gives me peace of mind. Quick followup question, so when he files his 2009 taxes, he will need to file form 709 for the $90,000 gift, and then when the donee gifts the remaining $30,000 to the third family member she will also need to file form 709 with her taxes? I don't know whether he and his wife file their taxes jointly, but if she does review the tax return, this money will no longer be hidden from her? I just want to make sure that he knows what he has to do and that the receiving family members are not at risk of penalties. Also - just to clarify - the receiving family members will not have to pay any income tax on the gift, correct? Thank you so much.
Hello againCustomer The Form 709 is filed separately from your regular tax return. It is due by April 15th, the same as your regular return, but it is mailed to a separate address, so it does not go with your regular return. It is correct that if he gives the entire $90,000 to one family member, and then that person turns around and gives $30,000 to another family member, both of them must file the form. If instead of doing that your uncle simply gave $60,000 to one person and $30,000 to the other person, then he could just report both gifts on the one form he files, and the other person would not have to file. Gift taxes, if and when they are ever due, are never paid by the recipient of the gift. The donor is the one who pays gift tax, and that only applies once he reaches his $1 million lifetime exclusion. In the meantime, the recipients of the gifts do not owe any gift tax or income tax and are not required to report receipt of the money. The only reporting that is required is the Form 709 by the donor, and that is only required when the amount of the gift exceeds $13,000 in any one year. If this was helpful please press the Accept button. Positive feedback is also appreciated. Thanks inchiago, and let me know if you have more questions.
Accountant
25+ years tax consulting. Specializing in returns for US citizens living abroad
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