It is common for families to want to help their children with major purchases such as cars, weddings, and the down payment to purchase a home. However, it is important to understand that gifts and loans above certain amounts may create additional tax reporting requirements.
The current annual gift exclusion limit is $16,000 per person per year. Therefore, a married couple may gift up to $32,000 per child, and if that child is married, up to $64,000 to the child and their spouse for the year. Any amount above that may be subject to the gift tax rules and may create additional tax filing requirements for the person(s) giving the gift.
Family members may also make loans to their children, whether interest-free or at a reasonable interest rate. If interest is charged on a loan the income must be reported as taxable income by the lender. Interest free loans may create gift tax issues to the parents since the parents are essentially “gifting” the amount of the interest to the children that was not charged on the loan. In this case, the amount of the gift will be determined using the Applicable Federal Rate (AFR) published by the IRS. The lender will also be required to report the phantom interest on their income tax returns even though the interest was not actually received.