@Rick9464 wrote:
I mentioned her 401K because that is how she is paying my line of credit back. In my mind, the taxes do not count but the actual gift amount would be the principal and interest. In reality, I loaned her the money for the kids and she is paying me back over 5 years. ARE YOU SAYING THAT BECAUSE WE ARE DOING THIS BETWEEN US ITS NOT A GIFT? SINCE I TOOK OUT THE LINE OF CREDIT FOR THE KIDS, DOES THIS MEAN IT DOES NOT CONSTITUTE THE DEFINITION OF A GIFT?
Not sure why you are confused.
(First to clarify, if the daughter is your step-child, they are legally the same as a biological child for income tax purposes. Not sure if that's what's going on here, just in case.)
You and your wife can each give your daughter and son-in-law $16,000 per year without triggering the reporting requirement. That's 4 gifts totally $64,000. If you want to give that much. It doesn't matter where the money comes from, once the money is in your bank account, it's just "money", it doesn't have a name tag saying where it came from. (The fancy word is "fungible").
Your wife can give you an unlimited amount of money each year without reporting it because that's a thing for spouses.
How you get the money is not relevant to the gift transaction, whether it is wages, savings, cashing out a retirement account, or finding it in the sofa cushions. If your wife withdraws money from a 401k plan for any reason, she pays the tax on the amount withdrawn. That is completely separate from how you dispose of the money afterwards, as a gift or to buy a car or anything else.
So in 2022, your wife gave $14K to each person. That's fine, and it's not reportable. In 2023, she could give up to $16K to each person, and you could gift another $16K to each person, if you wanted to, for a total of $64K. The gift limit is per person, and doesn't depend on any family or other relationship, it's just per person whoever they are.
If you and your wife feel it is necessary or appropriate for her to refill your broker account by cashing in the 401k, that's up to the two of you and how you want to run your finances. She pays the tax on whatever she withdraws.
