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Gifting money to a child for student loans - taxable? Limits?
Old 08-15-2019, 10:16 AM   #1
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Gifting money to a child for student loans - taxable? Limits?

My ex is going to give DD some money to help pay off some student loans. She had planned on giving DD $40k but her tax guy said there was a $15k limit before DD would need to pay taxes on the amount over $15k. Does that sound right? If so, are there other ways the ex can help pay the loans?

Btw, DD is not a dependent from a tax return point of view for neither the ex nor me.
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Old 08-15-2019, 10:24 AM   #2
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We just contacted the loan provider and paid directly for our sons loans. I was told there was no tax or gift issue to do it that way. Never checked into it any further.
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Old 08-15-2019, 10:24 AM   #3
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She would not actually owe tax right now but it would reduce her total estate exemption which is now 11.8 million. Is that going to be a problem. She would have to file a gift tax form to be correct
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Old 08-15-2019, 10:29 AM   #4
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There is a $15K limit on money that is gifted. I don't think DD has to pay taxes on it but it will trigger a gift tax return for your Ex. Your Ex can use the Federal Tax Credit amount ($11.8 million) for any amount over $15K so it's not like she will have to come up with the money. She would have to file the gift tax return.

However and instead of the above, there are ways around that $15K limit. Anyone can write a $15k check to DD or anyone else for that matter. So your Ex can write a $15K check to DD, another $15K check to you that you then route to DD, perhaps another or the remaining amount to a family member or friend that they route to DD.

Yes, it sounds like "musical checks" but it is all perfectly legal. Our family accountant had both of our parents do this to get money out of their estate. At that time, the Federal Estate credit was much lower than now. We had checks floating around the family.
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Old 08-15-2019, 10:30 AM   #5
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The GIVER has the responsibility to file the gift tax forms. The $15K limit is on the GIVER if they choose not to avoid the gift tax reporting.
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Old 08-15-2019, 10:30 AM   #6
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No, that doesn't sound right. Your DD needs to find a new tax guy. The recipient doesn't pay taxes. Neither does the giver. The article linked below explains this pretty simply.

https://www.nerdwallet.com/blog/taxes/gift-tax-rate/

Your ex could make the loan payments directly. No IRS forms required.
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Old 08-15-2019, 10:32 AM   #7
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I can't believe a tax guy would say there would be tax due now. That's so wrong. As Lemming said, she would just have to fill out a form to show an excess gift being used against her lifetime exemption. If she is remarried, it could be considered a joint gift of $30K, with only $10K as an exemption. Better yet, as pacergal says, she should be able to pay it directly with no gift implications. She should get a new tax guy, but that's her problem. In fact the whole thing is her problem. You daughter will not owe any taxes whether it is a gift or the loan directly paid.
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Old 08-15-2019, 10:33 AM   #8
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Originally Posted by Carpediem View Post
My ex is going to give DD some money to help pay off some student loans. She had planned on giving DD $40k but her tax guy said there was a $15k limit before DD would need to pay taxes on the amount over $15k. Does that sound right?
No, it does not sound right because her tax guy is wrong.

You do not have to pay tax on gifts over $15k because you have a lifetime gift tax exemption of more than $11,000,000. That means you can gift more than $11 million dollars over the course of your life to anyone you want, in any amount that you want each year, tax free. The $15k annual exemption number is simply an exemption amount that you can give each year without filling out any forms and without making a claim against your lifetime exemption, so if you give more than $15k to one person in one year, then you have to fill out a form to claim that amount against your lifetime exemption...but you do not have to pay any taxes. It's a shame her tax guy does not understand this.

https://smartasset.com/retirement/li...-tax-exemption
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Old 08-15-2019, 10:52 AM   #9
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Old 08-15-2019, 11:39 AM   #10
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Originally Posted by Carpediem View Post
My ex is going to give DD some money to help pay off some student loans. She had planned on giving DD $40k but her tax guy said there was a $15k limit before DD would need to pay taxes on the amount over $15k. Does that sound right? If so, are there other ways the ex can help pay the loans?

Btw, DD is not a dependent from a tax return point of view for neither the ex nor me.
No it doesn’t sound right.
1. DD would not have to pay taxes on gifts even if they exceeded $15k.
2. Your ex would need to file an extra tax form in case of exceeding $15k to one person in a given year, but not pay any taxes. It would be counted against her estate.
3. Her tax guy is not good.
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Old 08-15-2019, 12:02 PM   #11
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Originally Posted by pacergal View Post
We just contacted the loan provider and paid directly for our sons loans. I was told there was no tax or gift issue to do it that way. Never checked into it any further.
I believe this is inaccurate.

One can pay educational expenses directly to the college or university and not have it count against the $15K annual limit. However, I don't think that applies to paying on student loans, even if they were used for education. Also, according to this link (which is supported elsewhere), the exception is only for tuition, not other educational expenses such as room and board, fees, books, etc.:

https://www.schiffhardin.com/insight...ense-exclusion

OP, the following link might be helpful:

https://www.irs.gov/businesses/small...-on-gift-taxes
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Old 08-15-2019, 12:45 PM   #12
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Originally Posted by sheehs1 View Post

However and instead of the above, there are ways around that $15K limit. Anyone can write a $15k check to DD or anyone else for that matter. So your Ex can write a $15K check to DD, another $15K check to you that you then route to DD, perhaps another or the remaining amount to a family member or friend that they route to DD.
If the point is to have DD pay off her student loans from her own accounts and in her own name, do this. It avoids any gift tax return or use of Ex's Federal Tax Credit.
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Old 08-15-2019, 02:06 PM   #13
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...............................

However and instead of the above, there are ways around that $15K limit. Anyone can write a $15k check to DD or anyone else for that matter. So your Ex can write a $15K check to DD, another $15K check to you that you then route to DD, perhaps another or the remaining amount to a family member or friend that they route to DD.

Yes, it sounds like "musical checks" but it is all perfectly legal. Our family accountant had both of our parents do this to get money out of their estate. At that time, the Federal Estate credit was much lower than now. We had checks floating around the family.
https://en.wikipedia.org/wiki/Step_transaction_doctrine

It is not clear to me that it is all perfectly legal. I can believe that it happens all the time and people don't get caught because IRS doesn't know about it.
That doesn't make it legal.................the step transaction treats the separate, seemingly unrelated steps as one unified transaction which apparently is done to get around the maximum limit . Obviously you are not going to leave a written agreement that documents the transfer, but perhaps even an informal agreement that one is just a conduit for the funds might be enough to take the scheme down if IRS knew about it.
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Old 08-15-2019, 02:07 PM   #14
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Originally Posted by SecondCor521 View Post
I believe this is inaccurate.

One can pay educational expenses directly to the college or university and not have it count against the $15K annual limit. However, I don't think that applies to paying on student loans, even if they were used for education. Also, according to this link (which is supported elsewhere), the exception is only for tuition, not other educational expenses such as room and board, fees, books, etc.:

https://www.schiffhardin.com/insight...ense-exclusion

OP, the following link might be helpful:

https://www.irs.gov/businesses/small...-on-gift-taxes
agree w/ you...........
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Old 08-15-2019, 02:20 PM   #15
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Each of you could give DD $15k now, then the remainder next year.
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Old 08-15-2019, 02:36 PM   #16
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However and instead of the above, there are ways around that $15K limit. Anyone can write a $15k check to DD or anyone else for that matter. So your Ex can write a $15K check to DD, another $15K check to you that you then route to DD, perhaps another or the remaining amount to a family member or friend that they route to DD.

Yes, it sounds like "musical checks" but it is all perfectly legal. Our family accountant had both of our parents do this to get money out of their estate. At that time, the Federal Estate credit was much lower than now. We had checks floating around the family.
I would avoid doing this, even if legal (and there is some debate about that). I don't know your circumstances, but I can see a can of worms if the ex gives you money, and there is any delay in getting it to DD.

I would recommend your ex stay within the legal reporting limits ($15k). So, it would take 3 years to accomplish. I would further recommend your ex pays the lender directly. Maybe DD is extremely responsible, but this removes all doubt as to whether the debt was paid.

JMHO
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Old 08-15-2019, 02:51 PM   #17
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No, it does not sound right because her tax guy is wrong.

You do not have to pay tax on gifts over $15k because you have a lifetime gift tax exemption of more than $11,000,000. That means you can gift more than $11 million dollars over the course of your life to anyone you want, in any amount that you want each year, tax free. The $15k annual exemption number is simply an exemption amount that you can give each year without filling out any forms and without making a claim against your lifetime exemption, so if you give more than $15k to one person in one year, then you have to fill out a form to claim that amount against your lifetime exemption...but you do not have to pay any taxes. It's a shame her tax guy does not understand this.

https://smartasset.com/retirement/li...-tax-exemption
+1 She should fire her tax guy for giving her really bad advice.
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Old 08-15-2019, 02:57 PM   #18
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Each of you could give DD $15k now, then the remainder next year.
Where did you see any plans for the OP to give her money?
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Old 08-15-2019, 02:59 PM   #19
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This is an honor system technicality in the tax law. Does the student loan company report who payments are made by, to the IRS?

You can give her $15K, your ex $15K, your ex's DH can give $15K, you can each give her DH another $15K each if she has one. On January 1, you can give it again.

$40K is pretty easy to give away.
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Old 08-15-2019, 05:26 PM   #20
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https://en.wikipedia.org/wiki/Step_transaction_doctrine

It is not clear to me that it is all perfectly legal. I can believe that it happens all the time and people don't get caught because IRS doesn't know about it.
That doesn't make it legal.................the step transaction treats the separate, seemingly unrelated steps as one unified transaction which apparently is done to get around the maximum limit . Obviously you are not going to leave a written agreement that documents the transfer, but perhaps even an informal agreement that one is just a conduit for the funds might be enough to take the scheme down if IRS knew about it.
I can not imagine our Company Accountant of over 60 years and who is a stickler would have recommended it, especially when he knew he was going to have to file an Estate Federal Tax Return that included valuations on our business.

"A" can gift to "DD".
" B" can gift to "DD"
"C" can gift to "DD".

Then:

" A" can gift to B to reimburse him/her.
"A" can gift to C to reimburse him/her.

As far as I know, the IRS doesn't dictate who a person can gift to.
Or do as Senator above suggest. The clock starts over on Jan 1st.
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