Gifting rules if you pay someone’s loans

Ask NJMoneyHelp

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Q. My son has large college loans and I’m thinking of paying them off for him. Are there gifting consequences I need to know about or a gift tax?
— Parent

A. What a wonderful gift you will be giving to your son.

And yes, there are some potential tax consequences when planning a sizeable gift.

As of 2019, the annual federal gift exemption amount is $15,000 per year and paying these loans would be considered a gift by the IRS, said Chip Wieczorek, a certified financial planner and investment advisor with Tradition Capital Management in Summit.

“If you gift your son more than $15,000 a year to assist with student loans, you could become liable for a federal gift tax,” he said. “There is no gift tax in the state of New Jersey for a gift to your son.”

If the gift is more than $15,000, there are some rules that have to be followed.

First, Wieczorek said, the federal government allows a lifetime limit amount of $11.4 million for both estate and/or gift taxes in addition to the annual exclusion.

“For instance, if you were to pay off $100,000 of his student debt in 2019, the first $15,000 would fall under the annual exclusion and you could use $85,000 of your lifetime limit, reducing your remaining exclusion amount to $11.315 million,” he said. “The $85,000 of lifetime credit would be used by filing a gift tax return to show that amount has been used against your lifetime exclusion.”

The second alternative, he said, is if your child has a spouse.

Because the annual exclusion amount is per person, you are allowed to gift his wife an additional $15,000 each year and she can assist with the student loan repayment.

However, you cannot gift a married couple more than $30,000 per year without facing gift tax rules, he said.

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