I want to give each of my two kids $100k but I don’t want to pay gift taxes. So I open two separate bank accounts, two separate banks. Both of these are in my social security number. On one account my son is joint…on the other one my daughter is joint.
Now, I simply do nothing and let my kids withdraw money as they need it.
Will this work? Would I be breaking any laws?
I really don’t see how the IRS can know who is using an ATM card unless they are determined to investigate and sit through video footage galore. Or… do an assessment of the child.
“You have this lifestyle, but we see no record of you withdrawing money or writing cheques to pay rent or groceries, so we assume/assess you a higher income based on lifestyle.” I have heard Revenue Canada using this trick on drug dealers, I assume they learned it from the best.
And of course, any serious transactions - cash over $10,000 - means there is a paper trail, hence your kids won’t be buying a Ferrari with the money.
I didn’t mention it but these are employed, ADULT kids
Well, IANA US L, but isn’t there a donor reporting obligation. As in, if you make a taxable gift [above a certain threshhold?] don’t you have an obligation to tell the IRS about it?
If there is such an obligation, it’s wildly unlikely that its impact depends on the mode of payment you choose to adopt. The only issue would be whether the moment you are taken to have made the gift, and so incurred the reporting obligation, would be when you deposit the funds to the joint account, or when the beneficiary draws them out; I suspect the latter.
As long as they withdraw money wearing hoodies and don’t try to spend more than $10,000 cash in one shot, yeah, I doubt the IRS will notice. If the IRS does decide to investigate, they better have the income to cover their daily living expenses and the paper trail to show they paid the bills from their own money. But for a few thousand dollars a month, I doubt the IRS would notice or care.
Treas Reg §25.2511-1 Transfers in general.
No, you’re not breaking any laws if you file all required returns and pay all applicable taxes.
Basically, what the above says is that each time your child makes a withdrawal from the account, the amount of the withdrawal is considered a gift of the amount withdrawn at the time it was withdrawn. (This assumes that the withdrawal is not for a loan or payment for some bona fide business transaction between the two of you, etc.)
If your question is whether this scheme avoids gift tax requirements such as filing a return or possibly paying the gift tax, the answer is no.
If your question is whether you will get caught if you do it this way, the answer is maybe.
Please don’t forget that you do not need to file a return or pay any tax if you do not exceed the $14,000 annual exclusion amount. You need to file a return, but do not need to pay any tax until you exceed the $5.34 million dollar lifetime gift and estate tax exemption.
What if the kid also sometimes makes deposits to the account? Or if the kid even ends up depositing more than the parent? Surely, at some point the withdrawals stop being “gifts”.
If the kid withdraws more than he has deposited (plus the interest earned on what he has deposite), the excess is a gift from the parent, surely?
You’re not asking this in the hypothetical. Do you file fraudulent returns because you “don’t want to pay” income taxes? I’m sure you don’t. Imagine a very rich man giving his children a million or a hundred million dollars. Should that windfall be tax-free because he doesn’t want to pay?
Just get an accountant and set it up so you pay less but it’s legal. That way you still get to be a member of society, and your kids still get most of a hundred thousand dollars. God forbid lose a percentage point of their hundred thousand dollars to fund the government that created the system that allowed their family to become wealthy.
If the kid uses an ATM card for withdrawals, and makes sure his picture is not recognizable while doing so, and doesn’t live a lifestyle that makes it obvious he has an extra income source - then what are the odds he’ll come to the attention of the IRS.
Of course, the lifestyle restriction defeats the purpose. This trick might work for $100,000 but not for $100 Million. But for $100,000 simply give the maximum tax free every year and in not too long you’ll reach $100,000 or die trying. IIRC then there’s no tax on estates that size.
As I said in the other thread -
A much easier (and legal) way to to this, if you can stomach waiting a few years, is to give each kid $14,000 a year for seven years - that’s $98,000. Then give them $2000 the next year if you want. No gift taxes.
No reporting obligation, you mean. You can give much, much more than that before any gift tax liability is incurred - something in excess of $5 million, I think.
The $14,000 per year is the annual gift tax exclusion; if you give more than that, you still may not have to pay gift taxes, but your lifetime gift tax exclusion (north of $5 million) is reduced by the amount over $14,000. So if you give $20,000 to a person in one year, your lifetime gift tax exclusion will be reduced by $6,000. But not if you split that gift over two years.
But note that if you use up any portion of your lifetime gift tax exclusion, that amount gets subtracted from your estate tax exclusion when you die. Damned if you do, damned if you don’t!
That’s why annual gifts under the the threshold are very popular for estate planning purposes.
BTW, if you have a spouse, both you and your spouse can give to each of the children with independent gift tax exclusions. That way you could give $28K/year and it would only take 4 years to gift the $100K.
And if the children are married, the OP and his/her spouse can give $14,000 each year to each child and his/her spouse.
Reported.
$14k A-> B
$14k A -> C -> B
$14k A -> D -> B
etc.
Out of curiosity, how much gift tax would one pay on a $100,000 gift in the US?
So if you buy houses and cars for your kids, let them use them while you cover all taxes, fees, insurance, etc. while retaining ownership, is that still a gift? Those things all together probably don’t reach $100K, but over the years would. You could put these in your will to leave to your kids in the case of your demise.