Post # 1
I am hoping someone can help me with a tax-related quesiton. I will be graduating from law school soon with substantial student loans. Fortunately I have a great job waiting for me so I will be able to repay them, but in the meantime, they are accruing significant interest every day.
I am recently engaged and my fiance wants to start paying off big chunks of my loans now to avoid accruing all that interest. My question is this: I understand that if he paid off the loans without any other documentation, it would be treated as a gift by the IRS and taxed accordingly. We want to avoid this for obvious reasons. Another option is to treat this as a loan. This makes sense, particularly because he would be paying them off before we’re married, so if anything should happen and we called off the engagement (god forbid) it would only be fair for me to repay him the money he advanced.
We talked to his accountant about setting this up as a personal loan, but I’m still a little blury on how it would actually be structured (federal income tax was my worst law school grade, what can I say 🙂 ). Eg, would I still need to pay him interest? Could repayment be deferred? If I don’t pay him interest, will the IRS impute an interest rate and tax him on that even though I’m not actually paying him interest?
Has anyone been in a similar situation? If so, could you offer me some advice about how to structure this loan to result in the most favorable tax treatment by both myself and my fiance? Feel free to PM me if you’re not comfortable posting this publicly.
Many thanks in advance!
Post # 3
I would ask the accountant directly, but I think that you can structure it with interest and that payment is deffered until marriage then the loan can be forgiven because it is considered it under communal property. My dad helped a client do this and I can’t remember exactly how it was put, but I think that was the general jist of it.
Post # 4
I am not a tax professoinal by any means, but I thought gifts could be as large as 12k or something similar before being taxed. Unless he was planning on giving you more than that, I don’t see how it would be a problem?
Post # 5
As a fellow law student who got an A in Federal Income Tax… I’m not entirely sure either. Haha! I think @tksjewelry is right though… you’d have him “loan” you the money with interest, repayment deferred until marriage. Once you get married (as long as you don’t have a prenup making things weird), the income he would get from the interest would be community property, so it doesn’t really matter that it exists. I’m not sure whether or not you’d have to write him a check to actually “repay” it, but if you do – you can just have him cash it into a joint account and it’s not a big deal.
DEFINITELY get a professional accountant to help you with this though. Those IRS guys are picky!! Make sure it’s all totally in writing and enforceable and all that. Also, make sure you use a market interest rate, not just a tiny insignificant interest rate (or else it still operates as a gift).
Post # 6
@love108: You’re right abotu the gift tax exception, however this would be for a significantly larger amount so we wouldn’t fall under that exception.
@tksjewelry: Thanks for the response! I was concerned that deferring repayment for a year (until we’re married) would make it appear less like a loan and more like a gift, but it sounds like so long as there’s interest, it might work.
Post # 7
@bluebonnet: Thanks! Good to know about the interest rate issue.
Can interest payments be deferred as well, or should I be writing him checks for interest payments as soon as I graduate?
Post # 8
@lawgradtobee: I figured as much, but I never like to assume! That is really wonderful that your Fiance is 1) willing to help in this regard and 2) has the financial ability to.