How to do this properly to avoid gift tax?

[Mike9241]

if you loan her more than $10,000 you

1) you can charge her interest or not. the IRS doesn't really care but there are tax consequences 

2) if you do not charge at least the applicable federal rate (see the link) then the IRS says you have interest income at least equal to the applicable federal rate computed as specified,

3) if you charge less than the applicable federal rate two things occur

a) your daughter has made a gift to you of the difference between the AFR interest and the interest she actually pays you 

b) you have interest income taxable for both federal and state purposes equal to the interest she pays you plus the additional interest computes using the AFR rules. 

4) if you charge her more, you simply have more interest income. there is no effect on her.

put another way if the loan is for more than $10,000 you can not escape having interest income for tax purposes. 

ignore the 110/120% rates certain transactions require the use of higher AFR rates 

[danilol]

You said seperate check from my husband and I . But that checking account is jointly owned by my husband and I , we do not have seperate checking account, does that matter?

Thanks

[Opus 17]

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@danilol wrote:

You said seperate check from my husband and I . But that checking account is jointly owned by my husband and I , we do not have seperate checking account, does that matter?

Thanks

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Spouses with a joint bank account don't need to write separate checks.  However, you can write a gift letter that specifies each spouse is making an individual gift of $16,000, give your daughter a copy and keep a copy with your records. 

But I still say give her the $40K and just file form 709.  You won't pay gift taxes, and I'm not sure you have the expertise to handle the loan side of things correctly. 

[danilol]

@Mike9241 Hello,

The purpose of this question is just I want to learn more tax knowledge from you.

When you say" if I   charge less than the applicable federal rate two things occur (b) I  have interest income taxable for both federal and state purposes equal to the interest she pays you plus the additional interest computes using the AFR rules. 

I try to understand this with numbers.

Let's say If the applicable Federal rate is $100, then I only charge my daughter $50( the number she pays me) .

What is my taxable interest income? $50 +?

What is the additional interest computes using the AFR rules?

Thanks for all the answers that I got, it expands my understanding of tax and I learned something from you.

[danilol]

yes, just file form 709. it is easy.

Thank you.