Monies to Dependent Children

[Lion]

When do monies given become gifts instead of support? When parents pay college tuition, rent, car expenses, etc., for dependent children, is that support or is that gifts triggering gift tax returns? Is it different if the checks are written to the children instead of the landlord, etc.?

Cites are appreciated (it's for a lawyer).

[Lion]

Bump. (He's an anxious lawyer.) I'm finding monies to spouse are not gifts, and tuition and medical paid directly to providers. But, not seeing "support" items, such as rent, car insurance, gasoline, spending money, etc., specifically excluded from gifts if for dependents. Rent alone in expensive college town is over $26,000. So, is a gift tax return required?

[Burke]

It might be a fine line in some cases, but for dependent children (who are claimed by the taxpayer) where the items provided are for things normally considered support -- which are all the things you mention -- I would not consider it a gift. For children who are NOT dependents, it probably would be a gift.

[dtlee]

Take a look in §25.2503-6 where it states that "a qualified transfer on behalf of any individual is excluded in determining the total amount of gifts in calendar year 1982 and subsequent years."

Here is how they define these "qualified transfers" in §25.2503-6(b)

(b)Qualified transfers

(1)Definition.—
For purposes of this paragraph, the term "qualified transfer" means any amount paid on behalf of an individual—

(i) As tuition to a qualifying educational organization for the education or training of that individual, or
(ii) To any person who provides medical care with respect to that individual as payment for the qualifying medical expenses arising from such medical care.

(2)Tuition expenses.—
For purposes of paragraph (b)(1)(i) of this section, a qualifying educational organization is one which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on. See section 170(b)(1)(A)(ii) and the regulations thereunder. The unlimited exclusion is permitted for tuition expenses of full-time or part-time students paid directly to the qualifying educational organization providing the education. No unlimited exclusion is permitted for amounts paid for books, supplies, dormitory fees, board, or other similar expenses which do not constitute direct tuition costs.

(3)Medical expenses.—
For purposes of paragraph (b)(1)(ii) of this section, qualifying medical expenses are limited to those expenses defined in section 213(d) (section 213(e) prior to January 1, 1984) and include expenses incurred for the diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure or function of the body or for transportation primarily for and essential to medical care. In addition, the unlimited exclusion from the gift tax includes amounts paid for medical insurance on behalf of any individual. The unlimited exclusion from the gift tax does not apply to amounts paid for medical care that are reimbursed by the donee's insurance. Thus, if payment for a medical expense is reimbursed by the donee's insurance company, the donor's payment for that expense, to the extent of the reimbursed amount, is not eligible for the unlimited exclusion from the gift tax and the gift is treated as having been made on the date the reimbursement is received by the donee.

[dtlee]

I ams still looking for a cite for this....

I believe that there is also a provision that if you must have a legal obligation under applicable state law to support the person, your your payments to support that person will not be treated as payments as a gift to the person receiving the support Thus, payments made by a parent to support a minor child are not gifts to that child.

[David1980]

I'm interested.

Say for example the taxpayer that rents a home worth a few million, and has a 5 year old kid. When you allocate rent by square footage it's feasible the value of the rent could exceed $13,000 - do you do a gift tax return for your kid?

[dtlee]

Lion,

I have not found the cite I was hoping to find, but you might look at the case of Commissioner of Internal Revenue, Petitioner, v. Edmund C. Converse or Roland M. Hooker v. Commissioner where obligations rising out of divorce were not treated as taxable gifts. This has been interpreted as meaning that support of a dependent whom you are obligated to support is not a gift.

However, I also agree that we have a fine line between support and a taxable gift. Allowing the use of a parent's car may be support. Perhaps a providing a separate used car might be considered support. Perhaps providing a new car might be considered support. Perhaps providing a brand new BMW with all the options might be considered support. Perhaps it depends on whose name the registration is in. Perhaps it does not. However, somewhere in there, we may have crossed the line between support and a gift.

This likely changes over time and perhaps geographically as well.

At one time a laptop or cell phone were luxuries. Now, most students in college are expected to have a computer. On Judge Judy the other day, she asked a young adult why she didn't use her cell phone and refused to accept her response that she didn't have one because everyone her age has one. Are those now necessities?

Hopefully someone will find a valid cite to clarify this all for you.

Also, not every dependent claimed by a taxpayer includes a legal obligation to support that dependent, especially with the new Qualifying Child rules.

[dtlee]

I'm interested.

Say for example the taxpayer that rents a home worth a few million, and has a 5 year old kid. When you allocate rent by square footage it's feasible the value of the rent could exceed $13,000 - do you do a gift tax return for your kid?

I have asked similar questions in the past and not been totally happy with what I have heard or read.

Here are some situations I have questioned in the past and perhaps rationalized away or was simply glad that these were not my clients:

1. I heard that a parent provided an all-expense paid trip to (name a faraway land) for three weeks for their daughter and her friends as part of a graduation celebration (perhaps you could divide that by all four kids)
2. I have heard of parents spending over $75,000 on a wedding party for their daughter (you could argue that it is really for the guests)
3. An engagement ring is given that costs $15,000 (perhaps the groom received something of equal value in exchange).
4. A new car is bought as a chidl's 21st birthday present (perhaps the "dependent" now drives the taxpayer around in return)

I think that even though the amount has risen to $13,000, it has not kept up with inflation and there are probably numerous situations which are not being properly handled.

[Lion]

Doug's response about support of a child that would be mandated by law not being a gift triggered something in my memory from an old HRB class. Going to look through my notebooks/texts.

I live in a pricey area with high earning clients who have children at expensive colleges with expensive off-campus housing and expensive spring breaks and expensive clothes and electronics and a need for a reliable car and.... I'm remembering something about being spent on support, including recreation, as opposed to adding to a stock portfolio.

Thank you everyone for helping me search. As prices go up and our kids move back in between jobs, remain our dependents or return to being dependents, we can all face these questions.