Getting around Gift Tax in US

I’ve been transferring money to my fiance’s account to help her pay her student loans. I just realized that I went past my yearly gift tax allowance for her ($14,000 for 2013) by $3,000. I realize I’ll need to state this in my taxes for next April.

Unfortunately, she has a few more loans that I’d like to help her pay off. I don’t want to create more gift tax by transferring her more money this year. However, if I write a check to both of her parents for $8,000 each. Then both of her parents write her (their daughter/my fiance) a check for the same amount. This would give my fiance a total of $16,000. Will I or anyone involved (my fiance or her parents) be taxed or incur any fees for doing this?

Also, by writing a check to her parents, which then write a check of the same amount to her will I still only need to report the $3,000 I went over for gift tax or will the amount be higher?

I’m not getting married till next year and we would like to pay off her student loans before they accrue any more interest. I’d write a check to the loan company if I could, but they only accept payment through my fiance’s bank account.

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3 Responses to “Getting around Gift Tax in US”

  1. In 2015 there’s a $5.43M (That’s million, as in 6 zeros) estate exemption. Even though it’s $14K per year with no paperwork required, if you go over this, a bit of paperwork will let you tap your lifetime exemption. There’s no tax consequence from this.

    The Applicable Federal Rate is the minimum rate that must be charged for this to be considered a loan and not a gift. DJ’s answer is correct, otherwise, and is worth knowing as there are circumstances where the strategy is applicable. If the OP were a high net worth client trying to save his estate tax exemption, this (Dj’s) strategy works just fine.

  2. As I understand it, US federal gift tax doesn’t kick in at all until one person gives more than about $14,000 in a single year. (So a couple can give someone $28,000.)

    If you want to give more than that in a lump sum while avoiding gift tax, one workaround is to structure it as an intra-family loan. Basically, you write (and formally register) a loan for the amount, then gift them with up to the limit for them to pay off that loan. The IRS requires that you charge interest on this loan, but the rates are pretty minimal and of course you can incorporate that in the gift. The downside is that the interest income you’re required to take is taxable, but that’s a comparitively small sum. (On the other hand, if the loan is a mortgage against real property, and properly filed as such, the interest paid may be deductable for the person you’re giving the money to.)

    Doing this properly requires a tax accountant or lawyer who has a clue about the right legalese to make it work. However, there are starting to be some services which specialize in this, doing it for a fixed fee. I used one of those recently, which is why I’m somewhat familiar with this process; they made it about as much of a fill-out-the-forms process as they could, but it still took a few weeks for me to figure out which options were best for my needs.

  3. I’m a long way from an expert on this, but it seems to me you can loan your fiance enough money to pay off her loans, and that incurs no tax penalty. When you are married you can write off the loan without a tax penalty since she is your spouse. I would expect that you can reclassify a gift as a loan for a tax year you haven’t yet filed for – or she can give you the money back and you immediately make her a loan for the same amount.

    As the comments and this question would indicate, a loan at below an approved rate would be considered a gift. However you do appear to be able to loan her the money at an approved rate, and gift her the interest payments, which should be less than the gift tax limit. You would need to write up a loan document. Once you are married you should be able to make another gift to pay off the loan.