05 Jan Paying your child’s student loans

Q. I want to make a sizable payment to my child’s student loan. Are there any limits? It is considered gifting? Does it have any income tax ramifications either for the child or me?
— From Westfield

A. You’ve got a lucky student.

Yes, depending on the moves you make, there could be tax consequences.

The government taxes your income as you earn it, and it also taxes it when you give it away, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.

Kiely said there are certain thresholds you must pass before any estate or gift taxes are due. The thresholds are called “exclusions.”

During your lifetime you can gift certain amounts without incurring gift taxes. For 2016, the amount was $5.45 million, and that goes up to $5.49 million in 2017. The numbers are double for a married couple.

This is the “lifetime exclusion.”

The IRS defines a gift as any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return, Kiely said.

There is a $14,000 annual exclusion for gifts, he said.

If you gave someone a gift worth $15,000, you would have to file a gift tax return and report the $1,000 that is over the annual exclusion, Kiely said.

“You would not have to pay any gift tax because of the $5.49 million lifetime exclusion,” he said. “Instead, your lifetime exclusion would be permanently reduced by $1,000.”

Kiely said you would have to keep a copy of the gift tax return for the rest of your life.

It’s important to note that estate and gift taxes do not apply to transfers between married couples, Kiely said. And, a married couple can make a joint gift up to $28,000 per year.

“The gift tax exclusion applies to each donee — the person receiving the gift,” he said. “So a married couple with five children can give each of them $28,000 every year.”

In your specific situation, you could pay off $14,000 of your child’s debt every year without any gift tax consequences. You and your spouse could make a joint gift of $28,000 per year, and these gifts would not have any income tax ramifications for you or the donee.

That was for the feds.

New Jersey does not have a gift tax, but we do have an estate tax.

The New Jersey estate tax exclusion was only $675,000 in 2016, but the exclusion went up to $2 million in 2017. In 2018, the estate tax is repealed.

“President-elect Trump promised to abolish the estate tax entirely,” Kiely said, so keep that in mind going forward.

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This post was first published in January 2017.