Taxable Gifts Question

[bienville]

Perhaps a Doper better versed in U.S. Tax Law could fill in the details of the premise of my question (and/or correct any part of the premise that may be wrong). We begin with bienville’s basic understanding that gifts and prizes worth over a certain dollar value must legally be declared and taxes must be paid on such gifts. If someone gives me a gift of a million dollars, I must give Uncle Sam his cut.

What about a person who doesn’t give me money directly, but pays away my debt?

No, no one’s offered to do this for me. This question is inspired by the film Shopgirl, starring Steve Martin and Claire Danes. In the film, at the close of their romantic relationship Steve Martin’s character pays off all of Claire Danes’ character’s student loans.

Now, if he had given her the money directly and she then used it to pay off her student loans, the situation would effectively have been the same (until Uncle Sam came knocking at the door). Giving her the money directly would have been considered a gift and she would have had to pay taxes on it. Correct?

Since he did not give her the money directly, but rather paid the debt, is she in the clear? Or is the payment of the debt legally considered a gift?

A semi-related question, one that doesn’t come from the film: what about hugely generous discounts in a private sale? Suppose a wealthy person is bored with his year old car at the same time that a friend of his, let’s say it’s a very poor friend, needs a new car as his old clunker has died for the very last time. The Kelly Blue Book value for the rich man’s year old car in excellent condition with low miles is $40,000. Because the friend is very poor, and is having trouble finding a reliable car within his budget, the rich man offers to sell the year old car to the poor man for $1,000.

Again, had he given the car to his friend, it would have been a $40,000 gift- and therefore taxable.

But he didn’t give his friend the car, he sold his friend the car for $1,000. Is the $39,000 “discount” considered a gift???

[Hari_Seldon]

I recently read about someone who walked away from a subprime mortgage for, let us say, $200,000. The bank/mortgage-company, whatever valued the house at $1 and the IRS hit the poor guy (who had just lost his house) with a bill for taxes on $199,999.

I don’t know what the US law on the subject is, but in Canada you cannot even appeal a tax decision unless you first pay the taxes they claim you owe. Or maybe this is only Quebec taxes.

My understanding is that actual gift taxes are payable by the giver, not the recipient. but there are both lifetime and annual deductions which are relatively generous.

[friedo]

@bienville

If someone gives me a gift of a million dollars, I must give Uncle Sam his cut.

If someone gives you a gift of a million dollars, they, the giver, must pay the gift tax on it. You get to keep all $1 million.

What about a person who doesn’t give me money directly, but pays away my debt?

No, no one’s offered to do this for me. This question is inspired by the film Shopgirl, starring Steve Martin and Claire Danes. In the film, at the close of their romantic relationship Steve Martin’s character pays off all of Claire Danes’ character’s student loans.

Now, if he had given her the money directly and she then used it to pay off her student loans, the situation would effectively have been the same (until Uncle Sam came knocking at the door). Giving her the money directly would have been considered a gift and she would have had to pay taxes on it. Correct?

I don’t know if the answer is different for paying off someone’s debt (I imagine not in most cases) but again, it would be Steve Martin on the hook for the gift taxes, not Claire.

[ethelbert]

I have no cite for this, but it has always been my understanding that an exception exists for college tuition. If I pay off someone’s mortgage, then I owe gift taxes, but if I pay someone’s college tuition, I do not. I would think that same exception (if it exists in the first place) would apply to paying off college loans.

[Gfactor]

Expenses paid by another. If your personal expenses are paid for by another person, such as a corporation, the payment may be taxable to you depending upon your relationship with that person and the nature of the payment. But if the payment makes up for a loss caused by that person, and only restores you to the position you were in before the loss, the payment is not includible in your income.

Publication 525 (2022), Taxable and Nontaxable Income | Internal Revenue Service

Prizes are also taxable:

Gambling winnings. You must include your gambling winnings in your income on Form 1040, line 21. If you itemize your deductions on Schedule A (Form 1040), you can deduct gambling losses you had during the year, but only up to the amount of your winnings.

Lotteries and raffles. Winnings from lotteries and raffles are gambling winnings. In addition to cash winnings, you must include in your income the fair market value of bonds, cars, houses, and other noncash prizes. However, the difference between the fair market value and the cost of an oil and gas lease obtained from the government through a lottery is not includible in income.

And the Supreme Court noted a while back:

The discharge by a third person of an obligation to him is equivalent to receipt by the person taxed.

Old Colony Trust Co. v. Commissioner :: 279 U.S. 716 (1929) :: Justia US Supreme Court Center