We gave our granddaughter $10,000 from my wife's Keogh this year. We had started taking annual distributions from the account, although for a smaller amount. Our income tax preparer said the gift is not deductible. Our son, who is very knowledgeable about income taxes, says this is a one-time gift to a relative and is deductible. Who is right?
Not your son, that's for sure. Gifts to individuals are never tax-deductible, one time or any time. This makes me wonder what other advice he's given that could be injurious to your financial health.
He should have warned you not to take the money from the Keogh. Keoghs are tax-deferred retirement savings accounts for the self-employed. That means you have to pay taxes, at your regular income tax rate, on every dollar you withdraw. Any withdrawn dollars are thus no longer earning tax-deferred returns. So in one fell swoop you've added hundreds of dollars to your tax bill while giving up hundreds or even thousands of dollars in tax-deferred future earnings.