Lillian Karabaic is Pay Dirt’s new weekly columnist. She’s currently the host of Oh My Dollar!, a syndicated financial radio show, and a retirement advisor with Chaim Investment Advisors. She focuses on modern money issues that aren’t typically represented in the mainstream, like variable income, LGBTQ+ relationships, and trans health care.
Pay Dirt is Slate’s money advice column. Have a question? Send it to Lillian, Athena, and Elizabeth here. (It’s anonymous!)
Dear Pay Dirt,
I know, technically, monetary gifts that exceed $15,000 are supposed to be reported to the IRS. But how is this monitored? I recently bought a house with my wife, but like most people in my generation, we couldn’t afford it on our own. My parents provided a substantive gift through our lender to make up a good chunk of the down payment we couldn’t cover (maybe we will be able to pay my parents back in the long run). I have no idea if this is supposed to be reported, but my parents talked to their financial advisor and seemed to think we are in the clear.
Separately, my grandma wants to gift me $30,000 to help with remodeling our house. I’m not sure if we should split the money out over two years to avoid exceeding the $15,000 or if it’s OK to accept all at once. Finally, to help cover our mortgage, my wife and I rented out a room in our house for about $1,000 a month. But my parents have been adamant we should not report all of this on our taxes and that to do so would be ridiculous.
Altogether, these three things make me nervous we’re suddenly tax dodging jerks. I don’t want to be like some billionaire avoiding paying their share to society. At the same time, we definitely aren’t billionaires. I have a good salary, but my wife makes less than half what I do. We want to start a family soon and this money is so helpful. This is a privileged problem to have, and not exactly a case of a server not reporting cash tips. All in all, is this something we could actually be discovered and penalized for? And even if not, should we report this to be ethical tax-paying citizens?
—Not Poor But Not Rich
Dear Not Poor,
I remember the first time I filed a Schedule C for a bit of freelance income—it struck me as absurd that I just told the IRS what I made. The government is really relying on me to tell them how much is in this envelope of cash I took home from a gig? Having to figure out what to disclose and what can be deducted is one of the most frustrating parts of the complicated U.S. tax system. That’s why many people hire tax preparers to navigate filing.
The good news is that gift taxes are not your responsibility to file as the recipient. For most gifts over $15,000 given to a person in a single year, the gift giver must file the IRS form 709. Gifts include forgiving debt, like your parents’ loan. Your grandmother can structure the gift for your remodel to stretch over two years, or (if she has one) her spouse can gift the other $15,000 and not trigger taxes. (For 2022, that limit rose to $16,000.) They will still have to fill out a form to consent to splitting the gift.
Your parents will likely not owe tax on the gift unless they hit the shocking lifetime gift limit of $12.06 million in 2022. Most financial advisors are not tax attorneys, and your parents’ financial advisor may not have realized that they needed to file.
When it comes to your obligations to pay tax on your income as a landlord—because that is what it is what you are when you rent out a room in your house—the law is clear. You have to declare this $12,000 per year as income. Failing to do so could cause a lot of issues for you later on, including getting audited or owing IRS penalties. Especially now that the IRS has funding for more enforcement. Luckily, a portion of your expenses related to renting out your home can be deducted when you file.
While you might not be a billionaire hiding wealth in Panama, your circumstances are why these taxes exist. They are designed to make the generational transfer of wealth—from which you benefitted—be shared more fairly. It is hard to make it work in this economy for most of us, but even harder for those without family members who can afford to gift them tens of thousands of dollars.
Dear Pay Dirt,
I am single, have never been married, have no kids (I don’t want them), and live in an expensive city. I live in a small apartment and I’m pretty happy. I’ve been a good saver my whole life and have an almost eight-month emergency fund in place. My employer has been quietly laying off people in recent months and while I have been told by my direct manager that there are no plans to lay off anyone in my department, I am still worried.
I recently booked a birthday trip to Europe for my fortieth birthday in 2023 and can’t cancel the plans or will lose out on the money. With this round of layoffs, and the ever-present chance that I could be laid off, should I cancel the trip knowing I will lose out on the money, and try to save the amount lost so that if I do get laid off, I have my full account? Or should I just keep my account at the amount that it’s at, go on the trip, and hope I can make that amount back?
—Hoping for Europe
Go to Europe! Delaying a trip that you saved for and pre-paid based on the worry that you might get laid off is letting fear and anxiety run your life. If you get laid off, you may have to tighten the trip budget, but you’ll still be able to enjoy a refresh before starting a new job. (Plus, if you get paid in U.S. dollars, it’s an excellent time to take advantage of the strong dollar and weak euro to get a good deal on vacation.)
Dear Pay Dirt,
Should I declare bankruptcy? After three surgeries (two knee and one shoulder) in three years, I have crushing medical debt—all of which is in collections, that I don’t even know the total of anymore, and none of which I can afford to pay. I also have $5,000 in credit card debt, on which I pay the minimum of $200 a month and no longer use. I am 50 years old and have no savings to my name except for a 401(k) through work, against which I also have two loans totaling $6,000, and I pay the minimum of $82 a month each.
I have worked retail all my life and make what many would consider a very nice hourly wage. However, my rent just went up significantly. We all know about the exorbitant price of gas and food, and student loan payments will soon start up again. I owe $100,000 on an original loan of $20,000. I will never pay it off in my lifetime. To make ends meet, I donate plasma and receive some money from my parents every month (which is humiliating at my age). Because of my knee surgeries, standing any longer than I already do at my full-time job makes getting a part-time job impossible. At work, I have frequently been offered promotions to assistant manager, which would ultimately lead to a general manager position, but I suffer from severe anxiety and depression that medication and therapy don’t seem to touch. Having once been a general manager and flamed out spectacularly, I don’t believe I could handle the added stress.
Is bankruptcy an option for me? If so, how do I even go about declaring it? I know that it will not make my 401(k) or student loan payments go away, but even getting rid of the credit card payment will help, not to mention getting the specter of creditors off of my back. And is there anything I can do at all to try and start saving for retirement?
—Bankruptcy or Bust
Dear Bankruptcy or Bust,
Bankruptcy could give you a fresh start, but you must get informed about your medical debt to get clarity on the path forward. You need a list of all your creditors and what you owe. Medical debt can often be forgiven through charity care, but it won’t go away by ignoring it. Reach out to a nonprofit medical debt counseling organization like Dollar For and get assistance figuring out options to renegotiate your hospital bills or get them forgiven. Apply those same tactics to find affordable payment plans for your student loans when they resume—like the new income-driven repayment plan that is 50% lower than existing plans.
Tackling the debts individually could be a better option than bankruptcy. Your 401(k) loan won’t go away in bankruptcy. And while it is possible to get your student loans dismissed in this process, it’s a long and difficult operation. Filing for bankruptcy will require you to get organized about all your creditors anyway, and it isn’t cheap—sometimes around $3,000 in fees—and will put a black mark on your credit for 10 years.
Bankruptcy rules and costs vary by state, and you will need to talk to a bankruptcy-specific lawyer to get the pros and cons of your situation. Most bankruptcy lawyers will offer a free consult and give you a quote on the costs, but be cautious and get at least two opinions before proceeding. To find a reputable bankruptcy lawyer, ask for a referral from a trusted friend—don’t call the first lawyer you see on a late-night cable ad.
Once you’ve got a plan for your debts, whether it includes bankruptcy or not, take a deep breath. You got this far. Then, you can work out a budget that provides for some retirement savings. Take it one step at a time.
Dear Pay Dirt,
My son, 16, is financially responsible and conservative (to a fault—he’d go hungry if we didn’t tell him to buy food when out and about). I’ve issued him credit cards in his name, but of course, he’s not an actual creditor on them. Chase allows you to issue cards on your account to anyone (including, for fun, our dog). (I also have credit cards with Capital One, PayPal/Synchrony, Wells Fargo, Discover, Bank of American—basically all the big names.) What’s the best way to leverage my excellent credit rating and help him build out his credit, given that I trust him to use it all wisely?
—Life Skills Start Now
Dear Life Skills,
You can add your son as an “authorized user” (rather than just issuing a card in his name) on your oldest credit card, and he will gain the credit history of that card on his own credit report. Make sure the card is regularly used and paid for on time, every time. This is the fastest shortcut to help him build up some credit history now.
If you haven’t already, 16 is a perfect age to start handing a little financial responsibility to your son. This will help him gain a healthy rather than miserly relationship with money. He shouldn’t be terrified to spend money on food to the detriment of his health.
You can give him a spending limit credit card to be used on a variable expense, such as gas or food. He’ll have to track his spending on the card and ensure the bill is paid on time each month. This will give him some practical money management skills to go with that stellar credit score when he’s on his own.
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