If giving or receiving money, it is important to know what qualifies as a gift vs a loan. All parties involved should have a clear understanding of the difference and what is expected of them, so there is no confusion down the line.

When money is transferred with the expectation of repayment, it is considered a loan. This means the borrower will make periodic payments of principal and interest over a specified length of time to repay the advanced amount.

From a legal standpoint, a court will look for certain evidence to verify the intention of a loan. This will include a formal agreement signed by all parties detailing the amount provided, a schedule of repayments, and a specified term for repayment. After verifying the arrangement, the court will look for proof of consistent and ongoing repayments. If there is not enough evidence to suggest the money was meant to be a loan, then a court will normally consider it to be a gift. Therefore, it is important to make sure all terms are in writing and signed by all parties involved.

Once a loan has been established, it is final. Even in death, any balance is still owed by or to the estate of the deceased. Only a specific language in a will or trust can forgive the remaining amount of the loan. Any inheritance to the borrower 

may also be reduced by the amount of the loan still owed.

A gift is an amount given without any obligation for the money to be paid back. The 2020 annual limit for one person to gift to another is $15,000. When exceeded, a gift tax return (Form 709) will need to be filed by the giver. There is a lifetime exclusion ($11.58 million in 2020, adjusted annually for inflation) which would need to be exceeded before anything becomes taxable.

Paying for someone’s medical bills or tuition is not considered a gift and is not subject to the gift tax rules, however, the amounts must be paid directly to the third party. Gifts to a spouse or to political organizations are also exempt from the gift tax.

If you want more information on gifts vs loans, or need help with tax preparation, contact our tax professionals at The Innovative CPA Group at 203-489-0612.  Or contact us online.

By Rachel Schulze, Staff Accountant