I have decided to help my son pay off $40,000 in credit card debt. I have been informed that it is not just that easy. The problem is the IRS wants their share. Crazy isn't it!!!! They say I can give him a gift loan and would be reasonsible to pay income taxes on the imputed (I would give him the loan free of interest) interest rate of approximately 5%, unless he can satisfy an exception of less than $1000 net investment income. If I give him the $40,000 as a gift I would have to pay gift taxes. All I want to do is help him out! Why are they making it so diificult for the average person? Your comments would be greatly appreciated? Thank you.
unfortunately, the credit card companies would rather take a larger write off on the debt than settle for partial payment and that's why it's so difficult... you get better settlement percentages from collection agencies than from original creditors. also, as the debts continue to age they will accept smaller settlement percentages for the debts. if you loan him money interest free the IRS can charge you for interest income you should have collected but didn't.. federal and state. He gets a 1099 for the "forgiven" portion of the debt and owes taxes on it.. federal and state. The companies writing off the debt will overly inflate it so they actually (with the tax write off) make money off the write off but also thereby increasing artificially his "forgiven" portion of the debt and increasing his tax liability... I understand your dilemna. These were very large considerations when I filed bk. I had tried to settle the last of the larger debts but it was a lose-lose deal. I agree that the system makes no sense. i don't know if your son has current assets or income, and I dare say you seem like a person of high integrity to even want to help him out of this mess. While I agree that in theory paying the debts back makes sense, I will also suggest that if he qualifies and if his assets are minimal, perhaps a chapter 7 bankruptcy may make financial sense and perhaps he should investigate it and consider it. I did learn my grandfather had a point when the phrase "good money after bad" came up... There are no tax implications when debts are discharged under a chapter 7. He would be free and clear. If you wanted to help him rebuild his life you could loan him some money to get a secured credit card and/or a car loan the day after the bk is discharged. And your money wouldn't be going to usury charges and fees that the banks have undoubtedly imposed. I know a bk is distasteful and perhaps may not be an option for him, but it sounds like maybe it should be thoughtfully considered. It's one thing to owe creditors, but when settlements then turn into misc income (and required tax payments)... well, I wouldn't want to see him go from owing kitty cats like credit card companies into owing guerillas like the IRS... that's a whole different ball game. Good luck in whatever you decide. It's really nice to hear of someone willing to help their child so much. As an aside, if the debts are to collection agencies, do you have an atty friend who could approach the companies (collection agencies, I think) and ask to buy the accounts??? You might be able to do that for as little as 5 percent of the outstanding debt and then your atty could just forget to ever collect of the debts again. The rich tend to have someone buy their debts for them. Just a thought I believe Lizardking here had his father-in-law approach a collection agency asking about buying one of his debts and the offer was very low and the collection agency was willing to sell the account...
I believe you are allowed to gift $20,000. a year,and so is your wife.See your tax accountant. It doesn't make any difference until after you leave, when it will count against your lifetime gift allowance of $600,000. (these are old figures, so check with your accountant) By te way, I hope you have someone trustworthy negotiating this "pay-off" to make sure your son's credit record is cleared and none of any "negotiated" write-off debt is resold to another collection agency.Plus, it might be a good idea to have your son get some credit counseling.Otherwise, you might wind up having to bail him out again.
