Sunday, February 1, 2009

Gift tax rules

QUESTION: Taxation question (loophole or just plain bad news?): If Parents of client want to give money to their child, can they give it by paying off things like the child's house, car, etc? Or will it be subject to taxes?

RESPONSE: One the one hand, parents can give their children as much money as they want--but if they give more than the "annual gift tax exclusion," the excess is subject to gift taxes. For 2008, the maximum was $12,000; for 2009, it's $13,000. So, if the parents give each child $13,000 this year, there is nothing to file, and no gift taxes to pay. If they give them $100,000 each, the excess is subject to gift tax rates. Paying off a car loan would not qualify for an exception to gift tax rules, as far as I know--though I'm not a CPA or tax professional. The exceptions that the test might bring up would include paying someone's tuition or medical expenses--these don't count as gifts as long as the payment is made directly to the education or medical provider. So, to wrap up--if the "kid" owes $13,000 on the car, the parents can either pay the holder of the loan or give the "kid" $13,000. They don't have to worry about gift taxes based on the size of the gift. The purpose of the gift isn't relevant here. If the loan is more than $13,000, though, the excess above the annual gift tax exclusion is subject to gift taxes. Also, if husband and wife file separately on their income taxes, they can each give the kid $13,000. See and search on "gift taxes," for more information on that. Just wondering, have the parents considered letting their kids pay their own damned bills? There are charities that try to cure cancer, help the homeless, feed the hungry, etc. Not really what you're asking, of course, and probably not what your clients would want to hear. It probably does explain why I don't work directly in the financial services industry--not sure that clients would want to hear the unvarnished truth and sarcasm never seems to work successfully as a sales tool.


  1. Hello.
    First of all, thank you for all of your help. Your textbook is great! I just hope I can pass on the first try.
    There is something I am confused about. It doesn't have to do with gift taxes. I'm having trouble finding the difference among these terms: Bond Buyer, Munifacts, Official Statement. I always get these wrong when taking a practice exam. It would be great if you can clear this up.
    Again, thank you.


  2. Hi, Daniel.

    My advice is to view the "real world" versions here, as opposed to memorizing bullet points that have no real meaning to you. Go to and poke around . . . you can get a FREE 2-week subscription to it, and there are many testable points in there. I have about a dozen issues in my office, and I like to see the actual "visible supply" or "placement ratio" or "results of competitive bids," etc. published there. The "Bond Buyer" is just a newspaper/website that municipal underwriters and city/state financial professionals would read. It has news on tax law changes, new issues coming to the market, regulatory issues, etc.

    I also have a preliminary official statement here for the City of New York, who was offering just under $1 billion dollars of bonds at the time. There is red text at the top alerting me that more information may be added (just like a red herring for stock). The official statement is prepared by NYC and it discloses their budget, their financial condition, the tax treatment of the bonds, etc. You could probably request an official statement from your city/county/state for a past or current bond offering.

    Munifacts is/was a wire service. Pretty sure it's defunct now, replaced by the MSRB's Real-time Transaction Reporting System (“RTRS”) covered by Rule "G-14." You can view that rule at under "rules, forms, and glossary." Use that glossary, too. Why trust anyone to read what you can read yourself?

    Also, note that an "official notice of sale" is an announcement that an issuer publishes in the Bond Buyer to attract underwriters. The "official statement" is the disclosure document delivered with the bonds to investors. In other words, the two things have NOTHING to do with each other and are used at different stages of the process.