5

For tax purpose in the US, what are the differences between

(a) you give away your money - gift tax?

(b) you loan someone some money - tax free?

(c) you pay back the debt you owe - tax free or tax deductible ?

It seems that for gifts, a value > 10K will be taxed, while for loans, only the "interest" is taxable ? But what if it's an interest-free loan? And what if it's actually a debt you are paying back (on an interest-free loan you borrowed).

  • You might want to tag your locality. Answers will differ depending on which country / state / city you're in. – Peter K. Dec 21 '15 at 12:41
  • 1
    thanks. yeah, just did. saw a few posts on this forum about "brutto v netto" and realized we say "gross v net" in the US while others use different terms – B Chen Dec 21 '15 at 12:55
  • Remember, in the case of a loan, you are paying taxes on your income, which you use to pay off the loan. Not all loans have tax deductible interest. Only certain loans, e.g., mortgage, student loans. There are some more for businesses. – mikeazo Dec 21 '15 at 13:13
  • How much are you actually looking to borrow/lend? That would impact how this is structured. – JoeTaxpayer Dec 21 '15 at 13:35
8

(a) you give away your money - gift tax

The person who receives the gift doesn't owe any tax.

If you give it out in small amounts, there will be no gift tax. It could have tax and Estate issues for you depending on the size of the gift, the timing, and how much you give away in total.

Of course if you give it away to a charity you could deduct the gift.

(b) you loan someone some money - tax free??

It there is a loan, and and you collect interest; you will have to declare that interest as income. The IRS will expect that you charge a reasonable rate, otherwise the interest could be considered a gift. Not sure what a reasonable rate is with savings account earning 0.1% per year.

(c) you pay back the debt you owe - tax free ?? tax deductible ??

The borrower can't deduct the interest they pay, unless it is a mortgage on the main home, or a business loan. I will admit that there may be a few other narrow categories of loans that would make it deductible for the borrower.

Notes:

If the loan/gift is for the down payment on a house, the lender for the rest of the mortgage will want to make sure that the gift/loan nature is correctly documented. The need to fully understand the obligations of the homeowner.

If it is a loan between family members the IRS may want to see the paperwork surrounding a loan, to make sure it isn't really a gift. They don't look kindly on loans that are never paid back and no interest collected.

  • +1 , would you like to add the $14K annual number? And reference to the $5M+ lifetime limit? – JoeTaxpayer Dec 21 '15 at 15:00
  • didn't want to add the numbers because we have no idea about the size involved, marital status of the parties, or the purpose of the gift/loan. – mhoran_psprep Dec 21 '15 at 15:13
  • 1
    If it is a nontrivial loan, you must collect a certain minimum mount of interest. (Under 0.03%, last I checked). It's legitimate to gift them with the interest, but you still have to track it and pay tax on it. – keshlam Dec 21 '15 at 15:56
  • Or a federal student loan... – Joe Dec 21 '15 at 20:42
5

If you are looking to transfer money to another person in the US, you can do do with no tax consequence.

The current annual gift limit is $14k per year per person, so for example, my wife and I can gift $56k to another couple with no tax and no forms.

For larger amounts, there is a lifetime exclusion that taps into your $5M+ estate tax. It requires submitting a form 709, but just paperwork, no tax would be due. This is the simplest way to gift a large sum and not have any convoluted tracking or structured loan with annual forgiveness. One form and done. (If the sum is well over $5M you should consider a professional to guide you, not a Q&A board)

0

The difference is whether or not you have a contract that stipulates the payment plan, interest, and late payment penalties. If you have one then the IRS treats the transaction as a load/loan servicing. If not the IRS sees the money transfer as a gift.

  • The interest rate can be smsll but not zero. Websearch "Intra-family loan" for more information about this. Not worth doing for tax purposes unless you'd trigger gift tax otherwise. – keshlam Dec 21 '15 at 16:04

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.