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While recent studies explore Large Language Models' (LLMs) performance on Theory of Mind (ToM) reasoning tasks, research on ToM abilities require more nuanced social context is limited, such as white lies. We introduce TactfulToM, a novel English benchmark designed to evaluate LLMs' ability to understand white lies within real-life conversations and reason about prosocial motivations behind them, particularly used to spare others' feelings and maintain social harmony. Our benchmark is generated through a multi-stage human-in-the-loop pipeline where LLMs expand manually designed seed stories into conversations to maintain the information asymmetry between participants necessary for authentic white lies. We show that Tactful ToM is challenging for state-of-the-art models, which perform below humans, revealing shortcomings in their ability to fully comprehend the ToM reasoning enabling understanding of white lies.