Over the past four or five years, I have been depositing funds into a custodial account for my child's education. My child, now 18, has decided not to attend college, but agrees that the money in the fund (now about $32,000) should be returned to me. The income has been taxed at my child's lower rate during these years. I realize that I must pay some back taxes, and perhaps a penalty, when I return the funds to my ownership. Could you please clarify how the additional taxes should be calculated and paid?
To transfer tax responsibility back to you, you would have to file an amended return (Form 1040X) for each year for the child, eliminating the income and requesting a refund. (You can only go back to 1984.) Then you should file amended returns for yourself, reporting the additional income and paying the extra tax. The IRS can be expected to send you a bill for interest, but any penalty would likely be abated. I recognize the ethical problem here, but I'm not sure you have either a legal or moral responsibility for the additional tax. The money was not transferred to the child as a tax evasion technique, but rather with legitimate intent to transfer the funds permanently, to be spent eventually for college. Things have worked out differently, and your child is not going to college, but is willing that the money be returned to you.
I suggest you consider the returned dollars a gift to you by the child of the child's own funds. The gift should be documented by the child on Form 709A; $10,000 of the total is exempt under the annual exclusion, while the remainder will go to reduce the child's lifetime combined gift/estate tax exclusion of $600,000. There would be no current tax consequences; and, given the facts as you have stated them, I don't think there is a legal or moral problem here.
I am an Army officer currently assigned to and living in Northern Virginia, but a legal resident of another state. I purchased a home in Virginia in 1977 during a previous assignment, leased it during an overseas tour and moved back in 1985. I expect to remain in the house until I retire in 1991 at the age of 55. Can I take the "over 55" income tax deduction on the house if I sell it and move to my home state (or other place of retirement)?
Even though you are legally "domiciled" in another state, the facts in your letter indicate that the Virginia house you are living in is in fact your principal residence. You will apparently meet the other qualifying requirements: you will be 55, and you will have lived in the house for at least three of the five years preceding the sale.
There might be a question if you had been maintaining a home in the other state to which you intend to retire; in that case, the other home might be considered your principal residence, with the Virginia home only temporary housing while stationed here. A determination would be based on the individual circumstances; as you describe the situation, I would feel comfortable taking the exclusion.
My question deals with children older than 14 with both earned and unearned income, but who also qualify to be taken as exemptions on the parents' tax return. Would both parents and children be better off if the children filed tax returns taking themselves as exemptions, or should they be taken as exemptions on the parents' return, recognizing they can no longer be claimed on both?
You're working from a faulty premise. The law doesn't offer you the option of taking the exemption on either return, but not both. Instead, a child who is eligible to be claimed as a dependent on the parents' return is not permitted his or her own exemption even if the dependent exemption is not claimed by the parents. (This rule is not limited to children -- it applies to anyone who may be claimed as a dependent on another's return.)
The obvious answer: Take the dependent exemption on the parents' return or lose it altogether.Abramson is a family financial counselor and tax adviser. Questions of general interest on tax matters, insurance, investments, estate planning and other aspects of family finances will be answered in this column. Advice cannot be given on an individual basis. Address all questions to E.M. Abramson, The Washington Post, Business &Finance News, 1150 15th St. NW, Washington, D.C. 20071