Remembering TCPaul, 2016-2019

Windfall cash - gift to spouse and tax treatment?

Let's say you win a $1 million lottery. You can gift that t wutwutwut04/09/19
No. The only way to avoid paying income tax the first year w underemployedlawyer04/09/19
no way to avoid paying the income tax Don't know why you'd dingbat04/09/19
Start a 501(c)(3). Give the $1 million to the 501(c)(3). H napoleone04/09/19
Not a tax practitioner, but I recall from Fed Tax 101 that h jd4hire04/09/19
Yes, but the charitable gift is deductible. Gross income in dingbat04/09/19
Thought there was a cap? superttthero04/09/19
I think if you hit levels of charitable giving over 50% of A wutwutwut04/09/19
Thanks all for comments. wutwutwut04/09/19
That Shawshank scene always confused me because inheritances onehell04/09/19
I never got the sense that Andy was going to bring down the superttthero04/09/19
Yeah I edited to add that, it's true that Andy may have been onehell04/09/19
Andy planned to escape from like day 1. It took almost that superttthero04/09/19
Well, the warden and that henchman guard of his did do all k onehell04/09/19
Well, he needed a fake person to take the fall but also to a superttthero04/09/19
Yeah, haven't read book either but heard same thing. Also cr onehell04/09/19
There are a number of states that currently impose inheritan jurisdocreviewer04/10/19
Yes, but Maine isn't (and wasn't) one of those states, and t onehell04/22/19
wutwutwut (Apr 9, 2019 - 9:54 am)

Let's say you win a $1 million lottery. You can gift that to your (US-citizen) spouse and effectively remove it from your estate.

But can you avoid the $1 million counting *as income* in the year you won it, by having given it to your spouse?

(Impetus - Shawshank Redemption scene where the guard is carping about the income tax he'd have to pay on money gotten from his brother's estate)

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underemployedlawyer (Apr 9, 2019 - 9:58 am)

No. The only way to avoid paying income tax the first year would be to gift it to charity . You won’t pay gift tax giving it to spouse but you still have the income tax

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dingbat (Apr 9, 2019 - 10:08 am)

no way to avoid paying the income tax
Don't know why you'd care about removing $1m from your estate. it's 2019, not 1999

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napoleone (Apr 9, 2019 - 12:18 pm)

Start a 501(c)(3). Give the $1 million to the 501(c)(3). Have the 501(c)(3) hire you and your wife as employees. Pay yourselves for the next 10 years.

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jd4hire (Apr 9, 2019 - 12:34 pm)

Not a tax practitioner, but I recall from Fed Tax 101 that having the ability to direct an amount of money to a charity is income realized. Although the money may never hit your bank accounts, you have the power to direct where it goes, i.e. it is your income to do with for a point in time.

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dingbat (Apr 9, 2019 - 2:04 pm)

Yes, but the charitable gift is deductible. Gross income increases by $1m, deduction increases by $1m, net income stays the same

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superttthero (Apr 9, 2019 - 2:08 pm)

Thought there was a cap?

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wutwutwut (Apr 9, 2019 - 2:48 pm)

I think if you hit levels of charitable giving over 50% of AGI the deductions start becoming reduced.

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wutwutwut (Apr 9, 2019 - 2:48 pm)

Thanks all for comments.

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onehell (Apr 9, 2019 - 3:17 pm)

That Shawshank scene always confused me because inheritances aren't subject to income taxes in the first place. Gift tax or estate tax, if any, would I think be paid thru the estate of the decedent; it wouldn't be income to the recipient. So it always seemed to me that the artifice of the gift to the spouse was unnecessary and conveyed no particular advantage.

The explanation I could think of was to figure that either (a) maybe the law was different in the 1940s when the story took place; or (b) more likely, Andy Dufresne was deliberately capitalizing on the guard's lack of knowledge of tax law to get him to do something which will appear to have "worked" in the sense that there would be no taxes. There wouldn't have been taxes anyway, but the guard doesn't know that and is too lazy or cheap to get a second opinion from a CPA in the free world. So regardless of whether it really was good tax advice, he would successfully curry favor with the guard and his fellow inmates which was his real objective.

After all, the end of the story is that he steals all kinds of money from the warden which was itself money that he was laundering for the warden. He wasn't exactly providing his free accounting services in full accordance with any kind of professional ethics. On the contrary, the whole idea was that he used the authorities' own corruption and ignorance of law against them, in the short term to curry favor and in the long term to both bring them down and finance his escape. The warden deliberately suppressed the evidence of his factual innocence by having the other inmate who witnessed a third party's confession to the crime murdered, so he knew he wasn't getting out by any legitimate means.

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superttthero (Apr 9, 2019 - 3:51 pm)

I never got the sense that Andy was going to bring down the Warden or Hadley but for the fact they turned on him when he had a chance to get out. He planned to escape, sure, but I don't think he would have sent the package but for how they treated him and killed the kid.

As it is fiction, I think the most likely explanation is a different law in 1940s or some other piece of the puzzle we don't have with respect to how Hadley got the money--if someone read the book they might know.

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onehell (Apr 9, 2019 - 3:59 pm)

Yeah I edited to add that, it's true that Andy may have been hoping to get out the legitimate way until that hope was dashed when the warden had Tommy murdered. I can't remember the sequence of events, as in whether that murder happened before or after the rooftop scene with the guard, but even it was beforehand, Andy had no reason to believe that such a witness existed before Tommy came into the picture so he didn't have any real hope of getting out until that brief window between the time Tommy related his story and the time he was murdered. I like to think Andy was planning his escape from very early on, and despite a brief window where he thought a court might actually let him go, perhaps all he did was pick up where he left off when that dream was dashed.

I also still have trouble with the idea that inheritances would have been taxable as income even in the 1940s. After all, whatever money you inherit has already been taxed when it was originally earned by the decedent, even in the absence of any kind of estate or gift tax. You pay taxes on capital gains from things you might do with that inheritance, but the initial payout itself has no policy reason to be considered income to the recipient, then or now, because then and now it would have been a form of double taxation to treat it as income.

I love the story so I don't want it to be premised on something that just isn't realistic, so the idea that he could do some tax tricks that do neither good nor harm but which appear to work and therefore accomplish the objective appeals to me. It isn't explicitly mentioned in the story, but it certainly isn't inconsistent with it.

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superttthero (Apr 9, 2019 - 4:07 pm)

Andy planned to escape from like day 1. It took almost that long to dig the hole.

I dont believe he planned to turn on the warden (sending the evidence to the press) till the warden killed Tommy which all must have happened in the last couple of months to a year before he escaped.

Whether he planned on taking the money when he did escape is not clear from the movie.

The scene on the roof happened very early in the movie. At that point he was just digging the hole or not yet digging the hole. Tommy came around near the end as noted above.

I'll check if it's on TBS right now......yes it is.

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onehell (Apr 9, 2019 - 4:52 pm)

Well, the warden and that henchman guard of his did do all kinds of corrupt-ass things even before the murder. Sometimes to Andy's benefit, like when he had that rapist beaten to the point where he never walked again.

I think that if I saw that kind of stuff going down, I'd be on pretty clear notice that this administration will break any rule if it benefits them and they don't think they'll get caught, which in turn would be pretty good motivation to both curry favor and to help out other inmates by making sure that they go down hard. So for that reason, I think that exposing him (and making off with his ill-gotten gains) may have been part of the plan from the moment Andy learned that the guy was laundering money.

Another thing that supports the idea of taking the money and exposing the warden being as much part of the plan as digging the hole is that he didn't just steal the money like it was just a pile of cash in a shoebox; he had made sure that this fictitious person he created who never existed except on paper (and who was the account holder for the accounts containing the laundered funds) was the identity he assumed after he escaped in order to get access to the cash. That required quite a bit of forethought, not just creating the fake identity but making sure he would have what he needed to assume that identity on the outside.

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superttthero (Apr 9, 2019 - 5:16 pm)

Well, he needed a fake person to take the fall but also to actually "do" the transactions. He wanted money laundered so it's not like he could bury it. He had to funnel it cleanly to the warden.

In fact, he explains to Red how he set it up so the warden could not be caught. Although admittedly it's not like he was sharing all his warden/accounting secrets with Red.

I may read the book... though I've heard people say this is one where the movie is better than the book.

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onehell (Apr 9, 2019 - 5:39 pm)

Yeah, haven't read book either but heard same thing. Also crazy how good that movie turned out to be. Roger Ebert's review talks about how it bombed at the box office and was quickly yanked from theaters, only to slowly grow into a phenomenon due to word-of-mouth driving video/DVD sales and endless buying by networks of the right to air it on TV, which is why it's now on all the time.

You just can't help but be flipping through the channels, run across it, and finding yourself just randomly watching it all the way through, even with commercials and even though you've seen it a bunch of times and probably have the DVD sitting around somewhere. It's just a weirdly appealing movie and you can never quite put your finger on why. It's not like you sit down with the intention of watching it for the millionth time, but when you happen across it and you don't have anything else to do, it always kinda sucks you in. I can't think of any other movie like that.

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jurisdocreviewer (Apr 10, 2019 - 9:58 pm)

There are a number of states that currently impose inheritance taxes that are paid by beneficiaries instead of the estate. Some also have estate taxes as well, New Jersey comes to mind.

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onehell (Apr 22, 2019 - 1:24 pm)

Yes, but Maine isn't (and wasn't) one of those states, and that's where the story takes place.

Here's a guy who wrote about it and came to the same basic conclusion I did, which is that he was just BSing to curry favor:

https://hauntedcoconut.com/2019/04/16/the-shawshank-redemption-andy-dufresnes-questionable-tax-advice/

"It is all a big sleight of hand. Andy will fill out an IRS Gift Tax form, maybe even file it with the IRS, and the government pencil pushers will shrug and look at each other like they will just use the paper to wipe their *sses later. But Hadley won’t know that.
What he will notice is that when Andy files his tax returns, there will *magically* be zero tax on that inherited money. So Andy looks like a champ."

Just found it but this was my theory exactly, and it sounds like whoever wrote this actually took the time to look up what the law was in 1949, to boot. Bottom line is, the tax advice doesn't have to work, it just has to look like it accomplished something.

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