MilesBuzz! - Opinions Appreciated on Gift Tax/Buying Bonds

I don't know which forum would be more appropriate for my question. I posted here because there are quite a few past postings re: bonds (and I failed to generate any answers on the AX board last week http://www.flyertalk.com/forum/frown.gif ).

After reading this board, my significant other + I have decided to buy/cash in bonds regularly for miles... He brought up an interesting question and 'potential' complication that I need help with.

AX Gold card is in name of Party A. Cash savings to buy bonds is in checking account of Party B. Party A intends to charge (several times throughout the year up to the 30K limit per person) bonds on Party A's AX card under the name of Party A AND the name of Party B.

Party B will write the checks for the AX of Party A to pay for the bonds, and the bonds will be deposited back to the checking account of Party B. At the end of the year, is there any concern that it will "appear" (tho not be true) to the IRS that Party B has 'gifted' $30K to Party A, for which both would then have tax liabilities?

I tried to make my scenario simple....hope I succeeded!!!

I have read a TON of threads on the board on bonds and do not believe my issue has been addressed. The closest thread I've found (so far) regarding this subject is -

http://www.flyertalk.com/forum/Forum1/HTML/007115.html

After reading it, I don't think there will be a problem…but better to investigate before we buy what appears to be 60K of bonds and face a problem http://www.flyertalk.com/forum/smile.gif

Thanks a LOT for any help.

(edited to correct link)

[This message has been edited by ALadyNCal (edited 09-28-2002).]

<font face="Verdana, Arial, Helvetica, sans-serif" size="2">Originally posted by ALadyNCal:
At the end of the year, is there any concern that it will "appear" (tho not be true) to the IRS that Party B has 'gifted' $30K to Party A, for which both would then have tax liabilities?</font>

Yes. You ask a question, and that's your answer. Once the IRS peers into your accounts (in an audit), any deposits coming from sources not declared on your 1040 will raise a red flag. If you really, really want to do this (is it worth it?), draw up documents detailing the "transactions," and perhaps consult a CPA or tax attorney.

ALadyNCal

You are right, this probably does not belong in this forum and will likely be moved as the question is NOT about mileage, but some legal issues associated with buying bonds (Omni?).

pny...gives good advice when suggesting consulting a professional.

As to your question, as long as you are not expecting a professional answer:

If party A and B are married (your use of significant other perhaps means your are or are not??)or if they share the account that the cc and/or bank account are in then this is not the same as unrelated parties and accounts of different people.

Gift tax is NOT owing unless you have exceeded the max. A gift, if a gift would involve gift tax forms, tax would be a second issue.

The question of buying and immediately selling of bonds is of issue. You need to make sure you are fully measuring the lost interest with the value of the points earned.
Selling bonds is NOT that simple. You will find only some institutions will handle these transactions, the day you sell is important versus quarters, and you will need to have a material account..ie, banking relationship with the institution you sell thru. Some brokers MAY handle these transactions (mine does not) but you will pay a fee.

One more special hint, JUST IN CASE:
Do not forget that the limit on your card is the amount outstanding (current and past month) until any payment is posted for the prior month. I know a couple of people that have gotten into trouble with their cc company for not realizing this.

Finally, as long as you do not seem to care much about the bonds you purchase, I bonds allow you to buy $30,000 each SS# both face and actual money. EE bonds only allow $30,000 face or $15,000 of actual money. You can buy both and do $45,000 actual money or $60,000 face per calendar year.

Thank you both for the helpful info.

It seems it may not be as straightforward as I hoped.

To clarify, we are not married. The AX is in one peron's name and the savings account is in the other.

Our understanding (if a gift tax did apply) is that up to $10K a year is no problem...

I may have to modify my plan to more conservative goals and, as suggested, ask a tax attorney.

Thanks again http://www.flyertalk.com/forum/smile.gif

I have some opinions about the gift tax thing - but won't share them, because I really don't know and I think the best advice was the one about seeing a tax pro.

But I hope you know that you can't simply buy the bonds and then cash them in - there is a 6 month minimum hold time. What you might consider is both of you buying them - with one of you finding a credit card that offers points (miles) and has an intro rate of 0% for at about 6 months. This used to be true for the Hhonors card - I don't know if it still is, but given the way interest rates are it probably is.

I actually bought a bunch with a new Hhonors card - then after about 5 months of 0% I got an offer for a card that gave me 12 months at 0% on balance transfers (for a max fee of $45). So, except for minimum payments, I basically earned about 40000 hhonors points, and close to 18 months of savings bond interest for nothing.

I believe that if you kept records of your paper trail, they would see that you took savings, bought bonds, then transferred them back to savings. As long as you have proof of your withdrawal and bond purchase, then a record of you cashing them out, it would show where the money came from. Haven't cashed in any of my bonds yet, but I am really not worried about it. Large sums of money will not be showing up without explanation.

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Ms.DtG

volleyballferd -- thanks for the feedback, and YES, I realize you have to wait a minimum of six months to cash them in -- I've read a LOT on this board about it http://www.flyertalk.com/forum/smile.gif

dgordon -- great suggestion to document the paper trail, just in case http://www.flyertalk.com/forum/smile.gif

You'd save a lot of time and money just getting the right person a mileage-earning credit card in their own name. If you go through with your original plan, and are audited, perhaps the first question the IRS agent will ask you is why the other person didn't get their own credit card. If you can't provide a good answer, prepare for more flashlights (and perhaps even the suspicion that you're washing cash). If you really want the 60,000 miles, get the other person a card.

ALadyNCal,

I'll gladly give any feedback I can regarding savings bonds or anything else, for that matter - now if I can only find someone who has extra tix to the Angels' playoff game. http://www.flyertalk.com/forum/smile.gif

There are lots of reasons why someone wouldn't get their own card - they would get the miles, their credit worthiness is not there, they don't want another credit card, YOU want the miles, etc. Now you can get a secondary card on YOUR account in that person's name, and then the charges ARE on that person's name - and AMEX allows a secondary card to have it's own number. People transfer money between savings, checking and CD's all the time. As long as you have documentation. You are NOT talking about hundreds of thousands of dollars moving around. Your credit card statement is going to show you BOUGHT bonds. Just keep those statements together or easily located. I move money around all the time. When I decide to transfer money from one account to another because it is a higher yield, I am not worried that the IRS will consider this "new money"

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Ms.DtG

Another thing - if your AMEX card is a starwoods card, each of you could open an account, and because you have the same address you could transfer points between you. My husband has a different last name, and I never have any trouble. Then if your partner actually did have a credit card in his name - and the points showed up in his account, but you really want the miles, you could transfer the miles. Then the bonds bought in his name (you as beneficiary, let's say) and visa versa, could be done.

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Ms.DtG

Umm, one person transfering their own cash between their own accounts is not a taxable event. One person giving another person $30,000 is ordinarily a taxable event. Your "I know many people who transfer money between accounts" is, therefore, irrelevant.

I think you should be more conservative about advising people to do things that may bring them serious IRS trouble.

This will be my last post on this thread.

Thanks SO much for all the suggestions http://www.flyertalk.com/forum/smile.gif

I will try to get him a card on my AX account to keep it more straightforward.

The glitches that caused me to want to just use "MY" AX and "HIS" savings account to accrue miles for "US" with bond purchasing is because I already have the AX and great credit, and he has less of a credit history to get an AX and has the cash reserves that could easily be used to start "OUR" bond buying process.

I appreciate all the input http://www.flyertalk.com/forum/smile.gif http://www.flyertalk.com/forum/smile.gif http://www.flyertalk.com/forum/smile.gif

I suggest you ask your tax expert this:

What if you wrote up a simple document saying that you were simply loaning your S.O. the money for 5 - 6 months. He would be paying off the loan with the funds received from the sale of the bonds, and the funds would show as deposited in your account. Then the only gift would be the fair market value of the interest lost on the loan you made him. That amount should be well under the $10000 per year gift tax threshold.

You would have to show the I.R.S. the written agreement only if it questions the transaction, which seems to me to be unlikely .

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The Personal Travel Experience of Gary Steiger (http://home.earthlink.net/~pgary/TravelFrame.html) - including how to get free frequent flyer miles on the web.

pgary -- EXCELLENT suggestion! Thanks http://www.flyertalk.com/forum/smile.gif

I'm coming to this late (because I was traveling), but I work with taxes -- and the IRS -- every day. Several points should be made:

1. The annual gift tax exclusion -- which applies to anybody, without any limit on the number of recipients -- is $11,000 in 2002, not $10,000. It is now indexed to changes in the CPI.

2. Even if you give someone (other than your spouse, of course) more than $11,000 this year for something other than educational expenses (a special exception), you are not required to pay gift tax until you have given away enough to use up your "unified gift and estate tax credit." To boil this down to its bare essentials, you can give away about $1 million without incurring any gift tax liability. (I forget when it reaches that figure, but soon.)

3. If you have transfers going on but no real gift (that is, no intention to permanently transfer money), the worst thing that could happen is the IRS could impute interest on the short-term loan. Nothing to worry about, really.

Bruce

Bruce -- Great news. Thank you very much for your detailed input.

All of this info has been a HUGE help.

Thanks again http://www.flyertalk.com/forum/smile.gif http://www.flyertalk.com/forum/smile.gif http://www.flyertalk.com/forum/smile.gif

A few other thoughts.

With marital gift splitting, you can give up to $22,000 to an individual in 2002 and treat the gift as given 50% by your spouse.

Thus, neither you nor your spouse has exceeded the $11,000 annual exclusion. Both spouses have to agree to the marital gift splitting.

However, whenever you elect marital gift splitting, a gift tax return must be filed.

Whenever you exceed the $11,000 annual exclusion, you must also file a gift tax return. No gift tax may be due because you haven't exceeded your lifetime exclusion, but a gift tax return is still required.

We have concluded the most prudent thing to do (just in case) is:

1. Keep copies of all documentation related to the transactions
2. Party B (person with $$$) is going to draw up a notarized document for a line of credit to Party A (person w/AX) [versus a note].

Creating this document will hopefully clear up all questions and be dated prior to any transactions.

Now, I think I can purchase bonds and get started earning some MILES without any headaches!

Thanks again for the excellent suggestions and feedback! http://www.flyertalk.com/forum/smile.gif http://www.flyertalk.com/forum/smile.gif http://www.flyertalk.com/forum/smile.gif

The gift tax exclusionary amount is $11,000 this year.

<font face="Verdana, Arial, Helvetica, sans-serif" size="2">Originally posted by pgary:
I suggest you ask your tax expert this:

What if you wrote up a simple document saying that you were simply loaning your S.O. the money for 5 - 6 months. He would be paying off the loan with the funds received from the sale of the bonds, and the funds would show as deposited in your account. Then the only gift would be the fair market value of the interest lost on the loan you made him. That amount should be well under the $10000 per year gift tax threshold.

You would have to show the I.R.S. the written agreement only if it questions the transaction, which seems to me to be unlikely .

</font>

I think it's great that you got so much good advice...but in this case I would request the help of a tax professional...if oyu are ever audited (or things don't go as well as they should) are you going to tell the IRS "but Flyer Talk said I could do it!"

squeakr: You are correct http://www.flyertalk.com/forum/smile.gif We do have an attorney. During the next conversation we have, we will confirm with him. In the meantime, drawing up the document seems logical and prudent.

<font face="Verdana, Arial, Helvetica, sans-serif" size="2">Originally posted by ALadyNCal:
squeakr: You are correct http://www.flyertalk.com/forum/smile.gif We do have an attorney. During the next conversation we have, we will confirm with him. In the meantime, drawing up the document seems logical and prudent.</font>

I (we) would be very interested in knowing what your attorney says about this. Thanks.



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The Personal Travel Experience of Gary Steiger (http://home.earthlink.net/~pgary/TravelFrame.html) - including how to get free frequent flyer miles on the web.

if you were married, you can transfer property to each other tax free.

"if we were married", I probably wouldn't have started this thread http://www.flyertalk.com/forum/wink.gif http://www.flyertalk.com/forum/smile.gif http://www.flyertalk.com/forum/biggrin.gif

Personally, I wouldn't sweat it. As long as it's clear who put in how much and who got what bonds, and it all happens within a short time frame, I don't see that anyone will bother you about it.

I agree.

Bruce