The Shawshank Redemption is one of the most peculiarly loved films of all-time. Something about a clever man dreaming behind bars speaks to more people than I would’ve ever thought possible. But Rita Hayworth and I have one little question about a pivotal plot point: Was Andy Dufresne’s tax advice to the Captain Hadley bullshit?
Here’s how it goes: It is 1949, and atop a roof at the Shawshank Prison, Captain Hadley loudly groans that he has inherited $35,000 from his brother, but he is livid that the government is going to “take a big wet bite out of [his] ass” in taxes.
Prisoner Andy Dufresne dangerously interjects himself into the conversation insisting that the Warden need not suffer any tax burden at all, suggesting:
“If you want to keep that money, all of it, just give it to your wife. See, the IRS allows you a one-time-only gift to your spouse. It’s good up to $60,000…Tax-free. IRS can’t touch one cent.”
But is that true? Or was it at least true in 1949? Or was Andy just bullshitting for some beers and the fun of it. Let’s take a look at the tax law to understand.
One reason this plot line may have crept into the deliciously warped mind of Stephen King (and therefore, that of character Andy Dufresne) is because there was a major reform of the United States Tax Code in 1948, specifically impacting estate and gift taxes–including marital exemptions. But did it provide a tax shelter for Captain Hadley’s inheritance?
No. Because Hadley didn’t need one.
First, you need to understand that there are three different tax laws at play in this scenario: Estate Tax, Inheritance Tax, and Gift Tax.
The Estate Tax & the Hadley Family
If a deceased person’s estate is worth more than a certain threshold–as set by the IRS–then the estate itself (it’s an entity) has to file and pay some amount of Estate Tax on the bequeathed money before it is doled out to the beneficiaries.
In 1949, at the time of Brother Hadley’s demise, the threshold was as high as $60,000. But Hadley mentioned that his brother died with about a million bucks to his name. So Brother Hadley’s estate (run by a bunch of “ambulance-chasing, highway-robbing cocksuckers”) would have had to deal with Estate Taxes. Accountants–all of them paid by the Estate, presumably–would crunch the numbers, file paperwork, etc.
But none of that is Captain Hadley’s concern, since it turns out that his portion is $35,000 after all of those estate headaches, presumably. (And even if he gets less because the lawyers were turkeys, then he still has zero leverage on the situation, and neither does Andy.)
What Captain Hadley doesn’t realize is that his inheritance is totally tax-free. It won’t be taxable income, and he gets to keep every nickel. Andy needs to file no forms, nothing needs to be done.
The Inheritance Tax is a State Thing
There is a tiny little possible exception. See, at the federal level, the IRS considers inherited money to be tax-free, BUT there are a handful of States with Inheritance Taxes in place, which would make the inherited dough taxable only at the State level. Good news for the Captain, though! Maine does not have an Inheritance Tax, and didn’t even back in 1949. So unless Hadley is living in New Jersey and commuting to Maine everyday (ha!), his brother’s money is still safe.
Gifting Money to Your Spouse & The Gift Tax
Okay, we already know that the Captain wasn’t really going to have to pay any taxes at all on his $35,000 inheritance. That was Hadley just being ignorant.
Andy surely knew that. But that wouldn’t have gotten him buckets of beer and the goodwill of the Captain. So Andy messed with him a little bit and started talking up ways to cheat the Gift Tax–a completely different tax.
The Gift Tax is something that almost no one pays ever. It is a tax paid by the giver of a gift, but only if that gift is really, really, really valuable. Back in the 1940s, only gifts over $50,000 might be taxable, and today you only begin to sweat if the gift is over $5 million.
Oh, and spouses are immune from Gift Tax between each other anyway.
Even if Hadley inexplicably tried to “gift” his wife the money, the government would laugh, because, dude, she’s your wife. What’s yours is hers.
And besides, Captain….I’m not sure how yelling “hot potato” and throwing the money at your wife would ever, under any moon, stop you from owing even imaginary taxes. Otherwise I’d go up to the checkout counter with a cart full of groceries and just when they go to total my bill, I’d shove the cart wildly at my daughter and yell, “It’s a gift! It’s a gift! Haha, you can’t charge me sales tax now. Ooot!”
Then What Was Andy Talking About?
So if Hadley isn’t going to be taxed for the inheritance, and “gifting” the money to his wife isn’t even a real thing, what is Andy going on about?
Not even Harvey the Rabbit could tell you.
It is all a big sleight of hand. Andy will fill out an IRS Gift Tax form, maybe even file it with the IRS, and the government pencil pushers will shrug and look at each other like they will just use the paper to wipe their asses later. But Hadley won’t know that.
What he will notice is that when Andy files his tax returns, there will *magically* be zero tax on that inherited money. So Andy looks like a champ. Hadley feels good. And, hell, that may have be a huge favor to the Captain’s wife, since now the Hadley thinks the money is technically hers. Mwahaha.
So, in conclusion, yes, Andy’s tax advice was complete and utter bullshit. But it was pretty brilliant.
Historically, I’m pretty proud of Stephen King for thinking of it. A bored and curious Andy surely would have just read recently about the Tax Act of 1948, which would’ve been in the news, thus planting the nugget of inspiration in his brain.
It changed to what extent spouses can avoid taxes when gifting other people (outside the marriage), but has no bearing on Captain Hadley.
The $60,000 gift amount Dufresne seemed to pull out of his ass? That was in the 1948 law as an Estate Tax threshold. Nothing to do with gifts. Or spouses. Andy’s talking about different tax laws interchangeably, so it’s no wonder the audience is as confused as the Captain.
And I don’t know where the “one-time only” bit came from–I guess that was a bit of glitter and polish for the ruse.
But let me tell you, as someone who sat down and tried to understand the Tax Act of 1948, it was a pretty sure bet that Captain Hadley would never be able to sift through the language and understand that he was just taken for a few buckets of suds. Cheers to you Andy, for scoring a bunch of ice-cold beer from the hardest screw to ever walk a turn at Shawshank Prison.