# How does the law deal with someone paying a debt on my behalf? **URL:** \ **Category:** Factual Questions\ **Created:** [February 10, 2006, 2:08pm UTC](https://boards.straightdope.com/t/how-does-the-law-deal-with-someone-paying-a-debt-on-my-behalf/343857 "2006-02-10T14:08:37Z")\ **Posts on this page:** 20\ **Page:** 1
**Author:** ![Fuel](https://avatars.discourse-cdn.com/v4/letter/f/df705f/32.png) [@Fuel](https://boards.straightdope.com/u/Fuel)\ **Post date:** [February 10, 2006, 2:08pm UTC](https://boards.straightdope.com/t/how-does-the-law-deal-with-someone-paying-a-debt-on-my-behalf/343857/1 "2006-02-10T14:08:37Z")
Proud but curious tax-payer here. How does the IRS deal with this scenario: Unbeknownst to me, my mortgage company is getting checks from various people addressed to be assigned to my account. After about a year, my mortgage is paid off… I find this out when they start sending me back my monthly checks. My responsibilities: Am I responsible for the identification and correction of such a scenario? If so, how do I correct it? Am I responsible for any taxes in this scenario? How about replacing the mortgage with a credit card in this scenario? Does the fact that neither a mortgage or credit card is a legal _asset_ of mine mean anything significant here? We all KNOW that there is no loophole from paying taxes, that much is as sure as your and my death. Just wondering on the specifics of this VERY POSSIBLE scenario (if you know what I mean). ---
**Author:** ![Shagnasty](https://avatars.discourse-cdn.com/v4/letter/s/9dc877/32.png) [@Shagnasty](https://boards.straightdope.com/u/Shagnasty)\ **Post date:** [February 10, 2006, 2:24pm UTC](https://boards.straightdope.com/t/how-does-the-law-deal-with-someone-paying-a-debt-on-my-behalf/343857/2 "2006-02-10T14:24:03Z")
I am not an expert but I do listen to money talk shows and have dealt with these things personally. I think what you will be dealing with is [gift taxes](http://www.irs.gov/businesses/small/article/0,,id=98968,00.html). These are pretty straightforward. If someone gives you more than a certain amount of money or property in a year ($11,000 last year, $12,000 starting this year), it is considered income. Anything at or below that isn’t taxable for you. Gift taxes work as part of the calendar year: 2004 is one block with a $11,000 exemption, 2005 starts the clock over and has its own $11,000 exemption. Anything ABOVE that is considered income to you for tax purposes. This is where things can get screwy. If someone paid $5000 on your mortage, there is no problem. It is a gift under the exemption. If they paid $100,000, you could have a problem and get hit for a huge tax bill. In this case $100,000 - $11,000 = $89,000 which means that you are immediately liable for that amount of income last year and would need to pay a tax bill likely over $20,000 for last year’s taxes. ---
**Author:** ![Shagnasty](https://avatars.discourse-cdn.com/v4/letter/s/9dc877/32.png) [@Shagnasty](https://boards.straightdope.com/u/Shagnasty)\ **Post date:** [February 10, 2006, 2:29pm UTC](https://boards.straightdope.com/t/how-does-the-law-deal-with-someone-paying-a-debt-on-my-behalf/343857/3 "2006-02-10T14:29:31Z")
I should add that the $11,000 exemption applies seperately to each person that gave you the gifts. You indicate that there was more than one. You can receive up to $11,000 from each one without a problem. It is when one gifter exceeds $11,000 ($12,000 starting this year) that you income tax liability kicks in. ---
**Author:** ![iwakura43](https://avatars.discourse-cdn.com/v4/letter/i/9de0a6/32.png) [@iwakura43](https://boards.straightdope.com/u/iwakura43)\ **Post date:** [February 10, 2006, 2:48pm UTC](https://boards.straightdope.com/t/how-does-the-law-deal-with-someone-paying-a-debt-on-my-behalf/343857/4 "2006-02-10T14:48:12Z")
**Shagnasty** , I’m fairly certain that it’s the person who is _giving_ who is responsible for paying the gift tax. If my uncle gives me $20,000, he owes federal gift tax on $9000. (Or, he can reduce his cumulative estate tax deduction, but that’s a separate issue.) ---
**Author:** ![David\_Simmons](https://avatars.discourse-cdn.com/v4/letter/d/9de053/32.png) [@David\_Simmons](https://boards.straightdope.com/u/David_Simmons)\ **Post date:** [February 10, 2006, 2:53pm UTC](https://boards.straightdope.com/t/how-does-the-law-deal-with-someone-paying-a-debt-on-my-behalf/343857/5 "2006-02-10T14:53:06Z")
> [@Shagnasty](#): > > I am not an expert but I do listen to money talk shows and have dealt with these things personally. I think what you will be dealing with is [gift taxes](http://www.irs.gov/businesses/small/article/0,,id=98968,00.html). These are pretty straightforward. If someone gives you more than a certain amount of money or property in a year ($11,000 last year, $12,000 starting this year), it is considered income. Anything at or below that isn’t taxable for you. Gift taxes work as part of the calendar year: 2004 is one block with a $11,000 exemption, 2005 starts the clock over and has its own $11,000 exemption. I’m pretty sure that you do not pay taxes on gifts that you receive. I have this year’s IRS 2005 1040 booklet in front of me right now. Gifts are not listed as reportable income in the section under income . As a matter of fact gifts are specifically listed as a “nontaxable amount.” Under the heading “Line 21. Other Income” in that section there is the following: > [@](#): > > TIP: Do not report any nontaxable amounts on Line 21, such as child support; money or property that was inherited, willed to you, **or received as a gift** ; or life insurance preceeds received because of a person’s death. ---
**Author:** ![Shagnasty](https://avatars.discourse-cdn.com/v4/letter/s/9dc877/32.png) [@Shagnasty](https://boards.straightdope.com/u/Shagnasty)\ **Post date:** [February 10, 2006, 2:54pm UTC](https://boards.straightdope.com/t/how-does-the-law-deal-with-someone-paying-a-debt-on-my-behalf/343857/6 "2006-02-10T14:54:21Z")
> [@iwakura43](#): > > **Shagnasty** , I’m fairly certain that it’s the person who is _giving_ who is responsible for paying the gift tax. If my uncle gives me $20,000, he owes federal gift tax on $9000. (Or, he can reduce his cumulative estate tax deduction, but that’s a separate issue.) You may be right about that. People have always structured mine so they don’t go over the limits (married couple get double the exemption.). There is also a million dollar lifetime cap if that comes into play. The major point is that if the gifts were below $11,000 a person, the OP should be free and clear. That is as close to getting something for nothing as one could hope. ---
**Author:** ![Gfactor](https://avatars.discourse-cdn.com/v4/letter/g/9de053/32.png) [@Gfactor](https://boards.straightdope.com/u/Gfactor)\ **Post date:** [February 10, 2006, 2:56pm UTC](https://boards.straightdope.com/t/how-does-the-law-deal-with-someone-paying-a-debt-on-my-behalf/343857/7 "2006-02-10T14:56:46Z")
Almost, but not quite. If the payment is a gift, you don’t pay income tax on it. The giver will be liable for gift tax, but there is an annual exclusion for every person. > [@](#): > > The Annual Exclusion > The annual exclusion is adjusted for inflation and applies to each person every year. The amount for 2004 is $11,000. > > Example: On December 31 you give $10,000 to your son and $10,000 to your son’s wife. On January 1 (the next day) you give another $10,000 to your son and another $10,000 to your son’s wife. If you made no other gifts to your son or his wife during these two years, all of the gifts are covered by the annual exclusion. [http://www.fairmark.com/begin/gifts.htm](http://www.fairmark.com/begin/gifts.htm) > [@](#): > > If you give more than the annual exclusion amount to one person in a single year you’ll have to file a gift tax return. But you still won’t have to pay gift tax unless you gave given a very large amount. The rules let you give a substantial amount during your lifetime without ever paying a gift tax. As of 2004 the amount is $1,000,000. > You don’t use up any of this amount until your gifts to one person in one year exceed the annual exclusion amount. For example, if you make a $14,000 gift in 2004, you have used up only $3,000 of your lifetime limit. _Id._ > [@](#): > > What Is a Gift? > For tax purposes, a gift is a transfer of property for less than its full value. In other words, if you aren’t paid back, at least not fully, it’s a gift. [http://www.turbotax.com/articles/TheGiftTax.html?source=ttcommain#whatisagift](http://www.turbotax.com/articles/TheGiftTax.html?source=ttcommain#whatisagift) ---
**Author:** ![Fuel](https://avatars.discourse-cdn.com/v4/letter/f/df705f/32.png) [@Fuel](https://boards.straightdope.com/u/Fuel)\ **Post date:** [February 10, 2006, 3:15pm UTC](https://boards.straightdope.com/t/how-does-the-law-deal-with-someone-paying-a-debt-on-my-behalf/343857/8 "2006-02-10T15:15:08Z")
Doesn’t anyone want to address one of my most important points in my OP… that _if_ a mortgage or credit card account is not an asset, then any conrtibution to it by somebody else is not a legal TRANSFER of funds to ME? Sure, sounds like a silly technicality, but I want to know how the IRS deals with it. ---
**Author:** ![Shagnasty](https://avatars.discourse-cdn.com/v4/letter/s/9dc877/32.png) [@Shagnasty](https://boards.straightdope.com/u/Shagnasty)\ **Post date:** [February 10, 2006, 3:21pm UTC](https://boards.straightdope.com/t/how-does-the-law-deal-with-someone-paying-a-debt-on-my-behalf/343857/9 "2006-02-10T15:21:56Z")
> [@Fuel](#): > > Doesn’t anyone want to address one of my most important points in my OP… that _if_ a mortgage or credit card account is not an asset, then any conrtibution to it by somebody else is not a legal TRANSFER of funds to ME? > > Sure, sounds like a silly technicality, but I want to know how the IRS deals with it. This is just a guess but it has to be subject to the same gift rules. Otherwise, there is a glaring loophole for people to move money around to others without an tax implications. People could just set up mortgage or credit accounts, rack up lots of debt, and then someone else could just pay the bill for them. Repeat. That is just the commonsense take and why I thought that gift rules applied. Others seem to agree. I don’t know all the IRS rules but I fail to see how it could be any other way. ---
**Author:** ![Dewey\_Finn](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/dewey_finn/32/4222_2.png) [@Dewey\_Finn](https://boards.straightdope.com/u/Dewey_Finn)\ **Post date:** [February 10, 2006, 3:38pm UTC](https://boards.straightdope.com/t/how-does-the-law-deal-with-someone-paying-a-debt-on-my-behalf/343857/10 "2006-02-10T15:38:42Z")
> [@Fuel](#): > > Doesn’t anyone want to address one of my most important points in my OP… that _if_ a mortgage or credit card account is not an asset, then any conrtibution to it by somebody else is not a legal TRANSFER of funds to ME? > > Sure, sounds like a silly technicality, but I want to know how the IRS deals with it. Since the recipient doesn’t owe tax on a gift, I don’t think it really matter to the IRS whether someone sends you $11,000 or sends it to your mortgage company. ---
**Author:** ![DrDeth](https://avatars.discourse-cdn.com/v4/letter/d/b487fb/32.png) [@DrDeth](https://boards.straightdope.com/u/DrDeth)\ **Post date:** [February 10, 2006, 3:40pm UTC](https://boards.straightdope.com/t/how-does-the-law-deal-with-someone-paying-a-debt-on-my-behalf/343857/11 "2006-02-10T15:40:52Z")
A reduction in amount owed- “forgiveness of debt”-such as if your Mort company wrote off a part of your loan, or if you were a major exectutive who had a house buying laond from his company that the company “forgave” after a set period of time- is all “income”. And, taxable as well. IRC sec 61 is one of the very well written sections of the Internal Revenue Code:" a) General definition Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:" Of course it has to be income- otherwise you’d just have your employer send one of your check to your Mort co, and thus it’s be tax free. :dubious: There are special exclusions- if your are _Insolvent_ (which means you owe more that you have, but are not nessesarily Bankrupt), then a forgiveness od debt- up to the point where it overcomes your Insolvency- is tax free- sometimes. The above scenario where a Mort company writes off part of your debt to them (since it would cost them too much to foreclose) can often be non-taxable. Consult your Tax Professional. (I’d suggest my Bro, but he’s working FT now) Now, if the dudes paying your Mortage were doing so as a GIFT, then yes, the other posters here have been correct. Gifts are non-taxable to you. ---
**Author:** ![Fuel](https://avatars.discourse-cdn.com/v4/letter/f/df705f/32.png) [@Fuel](https://boards.straightdope.com/u/Fuel)\ **Post date:** [February 10, 2006, 3:43pm UTC](https://boards.straightdope.com/t/how-does-the-law-deal-with-someone-paying-a-debt-on-my-behalf/343857/12 "2006-02-10T15:43:54Z")
> [@Shagnasty](#): > > I fail to see how it could be any other way. Me too. THis is why I want to know what protocol is for dealing with this scenario, since it is not a transfer of funds from one person to another. Again, I KNOW, there are no loopholes in the tax code, that would be _impossible_ in the most extreme and intense meaning of the word. 😉 ---
**Author:** ![Fuel](https://avatars.discourse-cdn.com/v4/letter/f/df705f/32.png) [@Fuel](https://boards.straightdope.com/u/Fuel)\ **Post date:** [February 10, 2006, 3:58pm UTC](https://boards.straightdope.com/t/how-does-the-law-deal-with-someone-paying-a-debt-on-my-behalf/343857/13 "2006-02-10T15:58:52Z")
> [@DrDeth](#): > > There are special exclusions- if your are _Insolvent_ (which means you owe more that you have, but are not nessesarily Bankrupt), then a forgiveness od debt- up to the point where it overcomes your Insolvency- is tax free- sometimes. So, if I was purposely “poor” for a while (got fired from a job) for the sake of taking advantage of insolvency, I _could_ get “income” which is tax-free (“sometimes”)? NEVER! This would mean that I could buy a ton of productive assets on credit, get fired from my job and have unemployed status for a year or so, while working and using these assets under the table for those years to meet my living expenses, and have all these people I am working for during this time _send their payments to my credit card company_ over and above my insolvency so that I am not liable for their gifts!!! This would be impossible because, as we all know, there is no way around paying taxes, so AGAIN, how does the IRS deal with this? ---
**Author:** ![Shagnasty](https://avatars.discourse-cdn.com/v4/letter/s/9dc877/32.png) [@Shagnasty](https://boards.straightdope.com/u/Shagnasty)\ **Post date:** [February 10, 2006, 4:00pm UTC](https://boards.straightdope.com/t/how-does-the-law-deal-with-someone-paying-a-debt-on-my-behalf/343857/14 "2006-02-10T16:00:49Z")
> [@Fuel](#): > > Me too. THis is why I want to know what protocol is for dealing with this scenario, since it is not a transfer of funds from one person to another. You made good on one of those pyramid schemes didn’t you? “Just send $5 to each of these mortagage companies and in less than a year, you will find that others have mysteriously paid off your mortgage as well.” I just knew those worked. ---
**Author:** ![Balthisar](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/balthisar/32/2825_2.png) [@Balthisar](https://boards.straightdope.com/u/Balthisar)\ **Post date:** [February 10, 2006, 4:04pm UTC](https://boards.straightdope.com/t/how-does-the-law-deal-with-someone-paying-a-debt-on-my-behalf/343857/15 "2006-02-10T16:04:46Z")
To anyone that I’ve pissed off at my time here on the SDMB, if you really want to screw me over, whatever you do, please don’t pay off my mortgage! It’s payable over 28 years, and by doing so you’d be _forcing_ me to pay a _lot_ of money to the IRS right now, and I don’t have it! So don’t even think of going to Wells-Fargo and asking how to pay down someone elses’ account. I’m begging mercy. ---
**Author:** ![Shagnasty](https://avatars.discourse-cdn.com/v4/letter/s/9dc877/32.png) [@Shagnasty](https://boards.straightdope.com/u/Shagnasty)\ **Post date:** [February 10, 2006, 4:05pm UTC](https://boards.straightdope.com/t/how-does-the-law-deal-with-someone-paying-a-debt-on-my-behalf/343857/16 "2006-02-10T16:05:43Z")
> [@Fuel](#): > > This would be impossible because, as we all know, there is no way around paying taxes, so AGAIN, how does the IRS deal with this? You keep saying this but as many can testify, it isn’t always true. There are lots of ways to move money around to get different tax implications or avoid taxes altogether. It is easier for businesses because they can move money around in lots of different ways. Individuals would likely have to adopt a complicated lifestyle very far out of the norm and likely get others with money to cooperate but something could be done. However, most people don’t care or don’t think it is worth the effort. The loopholes that your typical person can exploit while maintaining a normal lifestyle have likely been closed but complicated systems always have “bugs” in them. ---
**Author:** ![Shagnasty](https://avatars.discourse-cdn.com/v4/letter/s/9dc877/32.png) [@Shagnasty](https://boards.straightdope.com/u/Shagnasty)\ **Post date:** [February 10, 2006, 4:07pm UTC](https://boards.straightdope.com/t/how-does-the-law-deal-with-someone-paying-a-debt-on-my-behalf/343857/17 "2006-02-10T16:07:15Z")
> [@Balthisar](#): > > To anyone that I’ve pissed off at my time here on the SDMB, if you really want to screw me over, whatever you do, please don’t pay off my mortgage! It’s payable over 28 years, and by doing so you’d be _forcing_ me to pay a _lot_ of money to the IRS right now, and I don’t have it! So don’t even think of going to Wells-Fargo and asking how to pay down someone elses’ account. I’m begging mercy. You can’t pay it in advance? What kind of mortage is it? ---
**Author:** ![Gfactor](https://avatars.discourse-cdn.com/v4/letter/g/9de053/32.png) [@Gfactor](https://boards.straightdope.com/u/Gfactor)\ **Post date:** [February 10, 2006, 4:07pm UTC](https://boards.straightdope.com/t/how-does-the-law-deal-with-someone-paying-a-debt-on-my-behalf/343857/18 "2006-02-10T16:07:29Z")
> [@Fuel](#): > > So, if I was purposely “poor” for a while (got fired from a job) for the sake of taking advantage of insolvency, I _could_ get “income” which is tax-free (“sometimes”)? NEVER! This would mean that I could buy a ton of productive assets on credit, get fired from my job and have unemployed status for a year or so, while working and using these assets under the table for those years to meet my living expenses, and have all these people I am working for during this time _send their payments to my credit card company_ over and above my insolvency so that I am not liable for their gifts!!! It’s not a gift if you get it as compensation for work. [http://www.slate.com/id/2134674/fr/rss/](http://www.slate.com/id/2134674/fr/rss/) ---
**Author:** ![BobLibDem](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/boblibdem/32/3149_2.png) [@BobLibDem](https://boards.straightdope.com/u/BobLibDem)\ **Post date:** [February 10, 2006, 4:36pm UTC](https://boards.straightdope.com/t/how-does-the-law-deal-with-someone-paying-a-debt-on-my-behalf/343857/19 "2006-02-10T16:36:49Z")
If I were you I’d get the mortgage company to investigate who’s sending in the payments to your account. It might be that somehow they have a loan number similar enough to yours that either they write it wrong or it gets keyed in wrong. If these payments are coming in accidentally, they’re going to want that money back when they find out. ---
**Author:** ![Gfactor](https://avatars.discourse-cdn.com/v4/letter/g/9de053/32.png) [@Gfactor](https://boards.straightdope.com/u/Gfactor)\ **Post date:** [February 10, 2006, 5:00pm UTC](https://boards.straightdope.com/t/how-does-the-law-deal-with-someone-paying-a-debt-on-my-behalf/343857/20 "2006-02-10T17:00:43Z")
Intro to Gift and Estate Taxation (IRS): [http://www.irs.gov/publications/p950/index.html;](http://www.irs.gov/publications/p950/index.html;) [http://www.irs.gov/newsroom/article/0,,id=107815,00.html](http://www.irs.gov/newsroom/article/0,,id=107815,00.html) > [@Fuel](#): > > ``` > Doesn't anyone want to address one of my most important points in my OP.... that *if* a mortgage or credit card account is not an asset, then any conrtibution to it by somebody else is not a legal TRANSFER of funds to ME? > > ``` > > Sure, sounds like a silly technicality, but I want to know how the IRS deals with it. Why is it relevant that a mortgage or credit card account is not an asset? You are assuming a false definition of income: > [@IRC section 61](#): > > (a) General definition > Except as otherwise provided in this subtitle, gross income means > all income from whatever source derived, including (but not limited > to) the following items: > (1) Compensation for services, including fees, commissions, > fringe benefits, and similar items; > . . . . > (12) Income from discharge of indebtedness; > **[U.S. Code | FindLaw](https://codes.findlaw.com/us/)** > > Find U.S. Code in FindLaw's searchable database. The Tax Code deals with your scenario by defining income far more broadly than you assume. While a mortgage debt is not an asset, it is a liability. Payments from whatever source discharge that liability, which results in an accretion to your wealth. The payments are also compensation; just like employer payments of premiums to your health insurer. It’s not a hard case. For instance, although I would like to, I can’t argue that child support payments, which my employer deducts from my check and pays directly to my ex, are not “legal transfers” to me. I never see the money, but the IRS does, and my employer takes taxes out of the part I get to keep, just as if the money was handed to me. [Next page](https://boards.straightdope.com/t/how-does-the-law-deal-with-someone-paying-a-debt-on-my-behalf/343857.md?page=2)