Q: “I want to pay off a sizeable ($15,000) debt that my adult son has. Are there any tax implications for either of us? —Jack
A: Your generosity will have no impact on your son’s taxes, but in theory it could affect the taxes on your estate down the road.
Every year, you’re allowed to give another person up to the annual gift tax exclusion—this year $14,000—without reporting the transfer to the IRS or having to pay taxes on the sum, says CPA Cari Weston, senior technical manager of the American Institute of CPAs taxation division.
For any gift above that limit, you will have to report the excess to the IRS through Form 709. That sum will be subtracted from your total lifetime gift and estate tax exclusion. Currently you can transfer up to $5.43 million in assets federal-tax-free over your lifetime, making it unlikely that any gifts will push your estate above that threshold.
Of course, there are easy ways to get around the limit and avoid any risk of estate taxes. If you’re married, you and your wife can together give up to $28,000 to your son per year. Or, if your son is married, you can gift him $14,000 and gift his spouse the other $1,000 to settle the debt, suggests Weston.
Paying the full amount directly to the creditor, while perhaps a wise financial move given your son’s current predicament with debt, will not help you get around the gift-tax limit, says Weston. No matter who the check is made out to, the IRS will still count it as a gift.
If you are covering tuition or medical expenses for another person, says Weston, you can get around the gift-tax rule, however, as both of these types of gifts are considered non-taxable.