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danilol
Level 3

How to do this properly to avoid gift tax?

My daughter need to have a car for her new job. She does not want to have a loan. She wants to borrow money from us to buy the car then she return the money little by little to us.

How can we do this properly to avoid the bank transaction be viewed as gift?  Say when we transfer money to her will be viewed as gift to her. Then when she transfer money to us will be viewed as gift to us. While if look at the whole picture , it is not gift at all, it just a borrow and return relationship.

19 Replies
NCperson
Level 15

How to do this properly to avoid gift tax?

@danilol - just sign a loan agreement - find one on the internet and agree on loan amount, rate and term - both sign it. .... then it's a loan and not a gift.  There are minimum interest rates required by the IRS; you can find the appropriate rate on this IRS document.  The interest is taxable income to you that should be reported.  (she can't deduct the interest as it is not mortgage debt).

 

https://www.irs.gov/pub/irs-drop/rr-22-17.pdf

 

if you decide to go back to the gift route, you and your spouse can give her up to $32,000 in 2022 with no gift reporting requirements. Looks like it may be $34,000 in 2023. 

 

 I wouldn't worry about the Bank transactions.  The Banks are required to report all transfers of more than $10,000 because of other federal laws. 

NCperson
Level 15

How to do this properly to avoid gift tax?

@danilol - by the way, there is no "gift tax" as that is a misunderstanding many make.  

 

when you gift more than $16,000 to any one indiviudal you are required to report that to the IRS.  it is just a reporting requirement; there is no tax for either party.

 

Then why report if there is no tax? Because of estate taxes.  Your estate avoids estate tax on the first $12.06mm of assets.  Let's say you passed away the day after giving your daughter $76,000. Since you gave her $60,000 more that than the annual gift limit, the amount of assets that can now pass tax free in your estate is now only $12.00mm.  In effect, you've advanced $60,000 of your estate limit while alive.    

Mike9241
Level 15

How to do this properly to avoid gift tax?

the loan itself is not a gift since it will be repaid.  however, under various sections of IRC 7872 if the loan is for more than $10,000 and interest at least equal to the Applicable Federal Rate (AFR) is not charged then the lender (you and your spouse) have additional interest income equal to the difference between the interest computed using the proper AFR and the interest actually received. Your daughter is treated as making a gift to you for this amount.

  

There are three AFR tiers based on the repayment term of a family loan:

(1) Short-term rates, for loans with a repayment term up to three years.
(2) Mid-term rates, for loans with a repayment term between three and nine years.
(3) Long-term rates, for loans with a repayment term greater than nine years.

 

The AFR rate can be found. 

In the case of any term loan, the applicable Federal rate shall be the applicable Federal rate in effect under section 1274(d) (as of the day on which the loan was made), compounded semiannually. (table 1)

https://www.irs.gov/applicable-federal-rates 

Opus 17
Level 15

How to do this properly to avoid gift tax?

Don’t dittle around trying to make the transaction look like something it’s not. Trying to hide a transaction can sometimes be illegal even if the transaction itself is perfectly legal.

 

Simply give your daughter a free gift that does not need to be repaid.  If you are married, you and your spouse may each give your daughter $16,000 a year without triggering the requirement to file a gift tax return. If $32,000 is not enough to buy the car your daughter wants, your daughter needs a talking to, not a free car. If you do make a gift of more than $16,000 per person, file the gift tax return. Actual tax is almost never required, but the gift must be reported.

 

Or, make the transaction a real loan, prepare a loan document and sign it, and charge your daughter interest.  You can make the terms anything you like. However, the IRS requires people to conduct their business in a businesslike manner, and you will be required to report income equal to the interest that you would have received if you charged the IRS minimum rate, even if you don’t charge interest. The applicable federal rate for September is 3.1%.

 

Or, make it partly a gift and partly a loan.  You could forgive part of the loan balance next year and call that an additional gift.

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
rjs
Level 15
Level 15

How to do this properly to avoid gift tax?

If you give someone money with the understanding that it will be repaid, it's not a gift. It's a loan. So don't try to call it something that it's not. Do it as a proper loan, with a written loan agreement.

 

NCperson
Level 15

How to do this properly to avoid gift tax?

@danilol and if you go the gift route, there is nothing that stops you from the two giving the daughter $32,000 this year and then another $32,000 on January 1st.... the limit is $16,000 per year per person (and as stated, may be $17,000 in 2023

danilol
Level 3

How to do this properly to avoid gift tax?

@NCperson I do not worry the bank transaction, too. Because the bank has to report those over $10,000. So it is what it was.

You mentioned transaction here, do I have to transfer money to my daughter's bank account or I can just use my account pay off the car at dealer. Say if the car is $40,000, then $32,000 out of this $40,000 is gift from my husband and I and no gift reporting required. Then we only need to sign a $8000 loan agreement.  

This year because my daughter is still in school, we paid her food and room and some other living expense, will those cost be counted as gift?

danilol
Level 3

How to do this properly to avoid gift tax?

@NCperson $12.06 mm is federal level. While different state has lower level for estate tax. Will this adavnced $60,000 be counted to the state estate tax if there is?

danilol
Level 3

How to do this properly to avoid gift tax?

@Mike9241 When you say "loan more than $10,000 and AFR not charged"( can I understand that I wavied interest from my daughter?)

Regarding this interest, if I charge my daughter, then this interest will be reported as my income. If I do not charge, then this interest will be viewed as gift money from my daughter. Is this correct?

What does AFR 110% AFR 120% mean?

danilol
Level 3

How to do this properly to avoid gift tax?

@Opus 17 Your ideal is very good.

Say if the car is $40,000. We pay off the car  for our daughter, then $32,000 is gift, the rest $8000 is loan. We probably do it this December. Then in Jan 2023 we forgive the balance of loan and it will be viewed as gift in 2023. Do I need to prepare any document for this forgiveness so as to be in a businesslike manner?

Does my daughter can give us gift money such as $16000 to mother and $16000 to father in one year and no need to report?

 

Thanks

danilol
Level 3

How to do this properly to avoid gift tax?

@rjs ok

Opus 17
Level 15

How to do this properly to avoid gift tax?

Why are you messing around? Why are you going to all this complicated trouble to avoid filing a simple form that has no tax consequence for you unless you are a millionaire? (If you are a millionaire, you should hire a professional financial advisor.)  

 

Financial support for tuition and living expenses for your own child in college is not considered a gift.

 

You would use the 100% AFR for a short, medium, or long-term loan, depending on the terms of the loan that you set with your daughter.

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
danilol
Level 3

How to do this properly to avoid gift tax?

yes, that is easy way. 

I am not tax expert, that is why I have some ideal that you think it is stranger.

Mike9241
Level 15

How to do this properly to avoid gift tax?

it would be okay for you to gift her $16K and your spouse to gift her $16K and then loan her the extra $8K. however that $8K should be evidenced by a note and have repayment terms that are enforced. fail in this last step and then you face the issue of not filing a gift tax return. 

really makes no difference if you gift her the money or pay it to the dealer but it should only be $32,000.  so it's probably better to give her the money. separate checks from each of you.

 

i would say that if you really want to give her the whole $40K. then you will have to file gift tax returns for both of you using up $4000 of your over $12 million lifetime exemption.  but this seems so much simpler for all involved. 

 

if you can claim your daughter as a dependent those other items you mentioned would likely be considered support which is not a gift. 

 

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