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Thread: Gift tax on sugar daddy allowance?

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    Default Re: Gift tax on sugar daddy allowance?

    ^^^ the answer to that question entirely depends on whether or not the IRS considers the financial transfers between you and your SD to be legitimate 'gifts' that are NOT taxable to you, versus being 'payments for services rendered', thus ordinary income that IS taxable to you. Unfortunately, IRS precedent strongly favors the latter.

    A contributing factor to that IRS decision is whether or not your SD declared the $72k paid to you last year as a 'gift' ... upon which HE has to pay an additional ( $72k-$13k gift limit ) * ~25% effective tax rate = $15k in federal gift tax. It is the GIVER ( your SD ) and not the 'recipient' ( you ) who must file and pay US gift taxes, if in fact the payment is actually considered to be a legitimate gift by the IRS.


    (snip)The treatment of a gift for U.S. gift tax purposes (the transfer tax) should not be confused with the treatment of gifts for other tax purposes. For example, for U.S. income tax purposes, most gifts are excluded (under Internal Revenue Code section 102[7]) from the gross income of the recipient, and thus are not taxed as income. For the purposes of taxable income, courts have defined "gift" as proceeds from a "detached and disinterested generosity." See Commissioner v. Duberstein (quoting Commissioner v. LoBue, 351 U.S. 243 (1956)).

    Gifts from certain parties will always be taxed for U.S. Federal income tax purposes. Under Internal Revenue Code section 102(c),[8] gifts transferred by or for an employer to, or for the benefit of, an employee cannot be excluded from the gross income of the employee for Federal income tax purposes. While there are some statutory exemptions under this rule for de minimis fringe amounts, and for achievement awards, the general rule is the employee must report a “gift” from the employer as income for Federal income tax purposes. The foundation for the preceding rule is the presumption that employers do not give employees items of value out of "detached and disinterested generosity" due to the existing employment relationship.
    "(snip)

    ^^^ it's the 'detached and disinterested generosity' provision that the IRS questions in regard to large cash payments being made by rich older gentlemen to attractive young females.


    If your SD did NOT declare the $72k paid to you as a 'gift', and/or things 'percolate' to the point where the $72k you received from your SD in 2012 is eventually considered to be ordinary income taxable to you ...

    - you'll wind up having to pay 15% social security tax plus ~20% federal income tax plus any state income tax = something on the order of $20-25k to the IRS and your state. The percentage / amount of income tax you must pay will be significantly higher ( like ~25% = something on the order of $25-30k ) if you are under age 24 and must be claimed as a dependent on your parents' tax return ( meaning that you cannot claim yourself on your own tax return ) !

    - you may wind up having to pay back FAFSA funds you received in 2012 that were granted without a $72k annual income level being declared on the FAFSA application. You will absolutely have to pay back any 2013 FAFSA grant money already received that you would not have been eligible for had your $72k annual income level been included on the FAFSA application. There is also a ( remote ) possibility that anybody who signed the FAFSA application ( you, your parents, both ? ) that did not include your $72k of income will be investigated for fraud ... but this typically only results in FAFSA requesting college bursar's office tuition payment records and IRS audit income numbers, with FAFSA coming up with a 'settlement' agreement that is satisfied by immediate repayment of any FAFSA funds already received for which the applicant wouldn't have been eligible had the correct total 'household' income level ( i.e. parents' income plus student's income ) been reported.

    - if you could be claimed as a dependent on your parents' 2012 tax return, an IRS decision that you in fact had $72k worth of ordinary income would undoubtedly result in an audit of both you and your parents even if FAFSA doesn't request an audit ... to assess both of your own and your parents' after-tax income levels ... and in turn judge whether or not your parents actually provided more than 50% of your support as required for them to claim you as a dependent.

    - If you are age 24 or older ( students under age 24 are statutorily defined as dependents of their parents regardless of relative income level ... unless 'emancipated' via a specific court ruling ), and unless your parents' income level is at least a couple of hundred thousand a year ( i.e. significantly higher than your $72k income level ), it is highly likely that the IRS will disallow your parents' claiming you as a dependent, thus increasing the amount of federal and state income tax which your parents must pay on their income.


    While the law requires that the money you received be reported to the IRS either as a gift ( by your SD ) or as taxable income ( by yourself ), the thought may obviously arise that since all of this money was paid in cash that it might be possible to 'forget' to report it. However, with automatic reports being made to the IRS by banks and credit unions, by college bursar's offices, by state motor vehicle dept's, by retailers when high dollar amount cash purchases are made, etc., its highly probable that these 3rd party reports made to the IRS showing significant levels of spending / saving, versus little or nothing in the way of officially reported income to explain where the money to enable that spending came from in the first place, will independently trigger an IRS audit. However, in that case, the IRS is very likely to enter into the audit with a presumption of tax fraud ... meaning that the IRS will question the accuracy of all self-generated financial records / income levels, meaning that the IRS may 'estimate' an actual income level that is even higher than the person being audited actually received as income ( for which no 3rd party documentation exists to disprove ), meaning that the IRS will continue to direct audit attention toward the person being audited in future years, etc.
    Last edited by Melonie; 02-09-2013 at 09:13 AM.

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