Dividing grandma's gift helps at tax time

Q: My grandma wants to give me $25,000 for a down payment on a house. When tax time comes around, what do I have to do?
- M., via e-mail

A: Technically, as the recipient of the gift you don't have to do anything, according to Minneapolis-based certified financial planner Scott Oeth. Your grandmother would be the one responsible for paying any gift taxes.

The current gift tax exclusion is $11,000 per year. She can give this amount to as many people as she pleases for free this year - to you and your spouse, for example. She could give you another $11,000 on Jan. 1, 2006. Your grandmother also can use a part of her $1 million applicable exclusion amount against lifetime gifts to shelter the entire gift to you in the current year. Finally, Mr. Oeth says she could give you $11,000 as a gift now and the rest as a loan, which she will forgive in future years against her annual gift tax exclusion.

Q: My elderly mother has a few bonds she bought in 1977. What can she put them into to lower her taxes?
- D.G., via e-mail

A: The best alternative for your mother would be AAA-rated municipal bonds, says Geordie Crossan, a certified financial planner in Westlake Village, Calif. These kinds of bonds pay interest (on a semiannual basis) that is free from federal taxes.

If you purchase bonds from mu-nicipalities within your state of residence, the income can be free from state income tax as well. The double tax-free income can be very beneficial for those in higher federal and state tax brackets.

Municipal bonds typically pay lower interest than taxable bonds. So make sure your mother is in a high enough tax bracket to warrant the purchase. Given that interest rates may rise over the next year or two, Mr. Crossan would limit the maturities to five years or less.