Posted on: 01st Jun, 2010 07:27 am
As one of her CD matures (TX -<$50K), my mother in law is wanting to give her daughter a one time sum that would in effect pay off the reminder of our mortgage. What are the legal and fiscal (IRS) implications of such action?
Hi aahodson,
Your mother-in-law will have to pay taxes to the IRS when the Certificate of Deposit (CD) matures. However, she does not have to pay taxes on the entire amount the CD will be worth after maturity. She will owe taxes only on the earnings and not on the actual investment amount. The exact amount of the tax she will owe on the CD depends on the amount of the CD, her income from other sources, her filing status, etc.
For instance, if the actual investment on the CD was $10000 and the rate of interest was 4%, she would earn $400 in interest at the end of the year. She will owe taxes on this earning of $400, and not on $10000.
When she transfers some of the money to her daughter, she can transfer it as gift. There is an annual gift tax exemption of $13k and a lifetime exemption of $1 million. She can claim these exemptions in order to avoid paying taxes when she transfers the money to her daughter. Her daughter can use the money to pay off mortgage without having to pay any tax for this pay-off. However, it never hurts to consult an accountant or a tax advisor before making the final decision on this kind of tax issues.
Your mother-in-law will have to pay taxes to the IRS when the Certificate of Deposit (CD) matures. However, she does not have to pay taxes on the entire amount the CD will be worth after maturity. She will owe taxes only on the earnings and not on the actual investment amount. The exact amount of the tax she will owe on the CD depends on the amount of the CD, her income from other sources, her filing status, etc.
For instance, if the actual investment on the CD was $10000 and the rate of interest was 4%, she would earn $400 in interest at the end of the year. She will owe taxes on this earning of $400, and not on $10000.
When she transfers some of the money to her daughter, she can transfer it as gift. There is an annual gift tax exemption of $13k and a lifetime exemption of $1 million. She can claim these exemptions in order to avoid paying taxes when she transfers the money to her daughter. Her daughter can use the money to pay off mortgage without having to pay any tax for this pay-off. However, it never hurts to consult an accountant or a tax advisor before making the final decision on this kind of tax issues.