The Moneyist: ‘I’d prefer the money never hits our account’: My in-laws live with my wife and me. They want to use their 401(k) to pay off our mortgage. What should we do?
I’m in an interesting position that I need some help with. My in-laws live with my wife and me, and have done so for some time. We initially moved in with them so I could finish my degree (I did), and the arrangement worked for us.
They moved cross country with us after our son was born, and then moved back after our daughter was born. Our son has some special needs, so having them around is very advantageous.
We pay the mortgage and bills, and they do a lot of the grocery shopping and some of the upkeep around the house. My mother-in-law works from home and my father-in-law is retired.
They also contributed the down payment of our first home, and have always been very generous to us. Recently, they met with their financial adviser regarding their 401(k), and they are soon able to start getting payments from it.
“‘I am afraid it will look like they are paying us rent, and we will have to declare that income.'”
Unbeknownst to us, they wanted to use that money to pay off our mortgage. Happy days for us, except we are at a loss for how to actually do it. They want to transfer an amount equal to our payment every month so we can pay down the principal.
I am afraid it will look like they are paying us rent, and we will have to declare that income. My father-in-law thinks that since they have already paid the taxes on it, we wouldn’t have to pay taxes.
I want them to make the payment directly to the bank — firstly, for the tax implications. I am super grateful they are willing to do this, but since I have no agency over the funds, I’d prefer the money never hits our account.
Am I being ungrateful? How should we handle this? I feel super lucky to be in this situation, but it’s already causing stress in the household and we need to figure it out sooner rather than later.
You’re not being ungrateful. You’re being careful. That’s OK. There’s no reason why it should cause stress. Your in-laws want to give you money toward your mortgage without any punitive tax consequences, and there is a simple way of doing it.
Each in-law is allowed to give you $15,000 each as a gift without it counting toward their $11.7 million lifetime exemption from federal taxes. That rises to $16,000 next year. You do not have to pay taxes on that income.
Nor does it matter if they put it into your checking account or directly into your mortgage account. When you take out a mortgage, the bank requires proof of income, but it’s up to you to decide how the installments are paid.
“When you take out a mortgage, the bank requires proof of income, but it’s up to you to decide how the installments are paid.”
Paying money toward your education and/or medical expenses is another way of giving you money tax-free, should you or your wife at any point wish to further your education, or if your children wish to go to college.
Your in-laws should make sure they have enough set aside for retirement and any unforeseen medical expenses, and paying off your mortgage in installments may be the wisest strategy, given that none of us knows what life has in store.
Additionally, some tax experts say this is probably a good time for elderly members of your family to make gifts, given the lower value of certain assets like businesses and/or potential increases in capital-gains taxes by the Biden administration.
Just make sure there are no strings attached. Given that housing is the No. 1 expense for most families, this sounds like a generous and kind offer made in good faith, and it should benefit you and your wife in the long-term.
Not everyone is as fortunate as you.
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