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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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    DO NOT give money to your fiancee's parents with instructions to pass it on to her. While the likelihood of the IRS noticing this is remote, it is nonetheless a tax fraud. Instead, follow JoeTaxpayer's advice and file a gift tax return (Form 709) by April 15, 2014 for 2013 gifts. No tax is due as long as you are willing to reduce your $5,250,000 lifetime combined gift and estate exclusion by $3,000 + $16,000 instead of just $3,000.
    – Dilip Sarwate
    Jun 2, 2013 at 2:35
  • Thanks for letting me know this. It didn't feel right, but I wanted to make sure.
    – wwwuser
    Jun 2, 2013 at 3:47
  • A note here. The gift exclusion is $14k in 2013. You went over by $2000. Only the $2000 goes against your lifetime exclusion.
    – JTP - Apologise to Monica ♦
    Jun 4, 2013 at 0:52
  • I already gave her $17K and am helping give another $16K, so I would be $3K + $16K over. Totaling $19K by the end of it.
    – wwwuser
    Jun 4, 2013 at 0:55

3 Answers 3

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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.

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  • But I still need to file paperwork for the $3,000 I went over this year, correct? I'm just confused about how the gift tax works in this situation where I'm trying to help my fiance pay her loans.
    – wwwuser
    Jun 1, 2013 at 21:39
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    @wwwuser yes. But if she's your fiancee - why don't you get married a bit faster and have the whole issue resolved by that?
    – littleadv
    Jun 2, 2013 at 0:13
  • Yes, form 709 if I recall correctly, but no tax due.
    – JTP - Apologise to Monica ♦
    Jun 2, 2013 at 1:34
  • @JoeTaxpayer The no tax due statement is correct only if Form 709 is filled out to indicate that the lifetime combined estate and gift tax exemption is being reduced by the excess over $14K per year per person. The default is that the exemption is not reduced at all and gift tax is due. For gifts made in 2013, Form 709 must be filed by April 15, 2014. It is not sent in with Form 1040 (or 1040A or 1040EZ) but is sent separately to an IRS office in Cincinnati OH. A copy should be kept with one's will since the executor of the estate will need the information to file the estate tax return.
    – Dilip Sarwate
    Jun 2, 2013 at 2:29
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    As we've pointed out, you are simply tapping your lifetime exclusion. Unless you're on track to have an estate of $10.5M between the two of you (and this adjusts for inflation) the effort here is minimal with no long term impact, just paper. And the cost is zero.
    – JTP - Apologise to Monica ♦
    Jun 2, 2013 at 13:35
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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.

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  • A genuine loan would have to carry some interest, else it's not a loan.
    – JTP - Apologise to Monica ♦
    Jun 3, 2013 at 0:03
  • 1%, first installment due in a year?
    – DJClayworth
    Jun 3, 2013 at 0:48
  • IRS has a regular update, quarterly, I believe, that provides the number. I don't have it handy. Will update when I find it.
    – JTP - Apologise to Monica ♦
    Jun 3, 2013 at 2:34
  • I concur. It definitely needs to be a market rate of interest. My in-laws loaned us the money for our house. The interest rate was set at the lowest market rate we could find at the time for a fixed-rate home loan. They get a check from us every month, declare the interest income, and we can take the mortgage interest deduction. If we didn't pay, or they charged us a below-market rate, it would count as a gift. The case at issue is a personal loan, but I'd think it would indeed be similar.
    – Rick Goldstein
    Jun 3, 2013 at 2:43
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    The interest received (or written off as a gift in 2014) has to be declared as income, and so there are some tax consequences, though not gift tax consequences. Spouses can gift each other unlimited amounts (unlimited marital exemption) and so the OP can loan $16K in 2013 to his fiancee at approved interest rate (balloon payment of $16K + interest due in one year's time), and write off the entire amount in 2014 as a gift free of gift tax (as long as they are married on the date of the gift), but the interest portion is income to him (and not a deduction for her) on the 2014 tax return(s).
    – Dilip Sarwate
    Jun 3, 2013 at 10:48
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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.

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