Gifting money to a child for student loans - taxable? Limits?

[Carpediem]

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.

 

[pacergal]

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.

 

[lemming]

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

 

[sheehs1]

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.

 

[RE2Boys]

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.

 

[gwraigty]

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.

 

[RunningBum]

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.

 

[JustCurious]

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/lifetime-gift-tax-exemption

 

[Carpediem]

I LOVE this forum!

 

[audreyh1]

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.

 

[SecondCor521]

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/insigh...ift-tax-medical-and-tuition-expense-exclusion

OP, the following link might be helpful:

https://www.irs.gov/businesses/smal...oyed/frequently-asked-questions-on-gift-taxes

 

[sheehs1]

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.

 

[kaneohe]

...............................

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.

 

[kaneohe]

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/insigh...ift-tax-medical-and-tuition-expense-exclusion

OP, the following link might be helpful:

https://www.irs.gov/businesses/smal...oyed/frequently-asked-questions-on-gift-taxes

agree w/ you...........

 

[joeea]

Each of you could give DD $15k now, then the remainder next year.

 

[CardsFan]

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

 

[pb4uski]

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/lifetime-gift-tax-exemption

+1 She should fire her tax guy for giving her really bad advice.

 

[RunningBum]

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?

 

[Senator]

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.

 

[sheehs1]

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.

 

[pb4uski]

Why are you all going down this linking gifts rabbit hole? The OP's ex can just gift $40k to DD to pay off the student loans and then file a gift tax return but no tax will be due.

If someone gives you more than the annual gift tax exclusion amount ($15,000 in 2018), the giver must file a gift tax return. That still doesn’t mean they owe gift tax.

For example, say someone gives you $20,000 in one year, and you and the giver are both single. The giver must file a gift tax return, showing an excess gift of $6,000 ($20,000 – $15,000 exclusion = $5,000).

Each year, the amount a person gives other people over the annual exclusion accumulates until it reaches the lifetime gift tax exclusion.

As of 2018, a taxpayer does not pay gift tax until they have given away over $11.2 million in their lifetime ($5.49 million in 2017).

https://blog.taxact.com/gift-tax-do-i-have-to-pay-gift-tax-when-someone-gives-me-money/

Yes, they muffed the math or have a typo.. the excess gift is $5,000.... not $6,000... but thie idea is right.

 

[sheehs1]

Why are you all going down this linking gifts rabbit hole? The OP's ex can just gift $40k to DD to pay off the student loans and then file a gift tax return but no tax will be due.

Because there is a way or a couple of ways for OP's Ex to do this without having to file a gift tax return.

 

[RunningBum]

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.

From the IRS:

What is considered a gift?

Any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money's worth) is not received in return.

I'll trust the IRS over your company accountant. Seems like he's less of a stickler than you think.

 

[target2019]

It is possible that in a 3-way discussion, Parents <> Child <> Tax Guy, information is not accurately passed on.

Get the loan account information, and pay down additional monthly, in smaller increments, across several years.

 

[sheehs1]

From the IRS:


I'll trust the IRS over your company accountant. Seems like he's less of a stickler than you think.

I'm unclear how this definition of a gift applies. Was this the entire link?

The OP now has 3 ways to advise his Ex, paying the loan off directly minus room and board, Senators' suggestion, my suggestion and all without filing a gift tax return.

What I suggested is not a novel idea. The OP or those interested can google it all themselves or ask their accountants. I googled it, but no point in providing the many links that say, "you can gift the limit to any individual or multiple individuals."

The IRS does not say any one recipient can not receive gifts from multiple individuals.