I have been working on and off with a couple, now divorced, who have had some tax issues. They owe(d) the IRS lots and lots of money.
They make good money, but never seemed to withhold enough. Hit their qualified funds and guess lived beyond their means for a time.
Well, one set of parents wanted to assist the kids. So, they gave them some money. Yet, it was not a gift. The money came with a tax obligation. They parents issued the funds from their business and then issued their child a 1099-Nec, to be able to deduct the “gift”.
So, the kids with tax issues and significant salaries received a 1099 for $10,000. They immediately owe self-employment taxes for 15.3%, yes, they get a bitty subtraction from income, but the whole amount of taxes is owed. They now owe $1,530 in additional taxes.
Then there are the ordinary income taxes, so let’s add $2,200 for federal taxes.
Illinois wants their piece, to add on another $500.
The $10,000 gift cost $4,230 in taxes and so netted $5,770. Not quite the gift they expected.
See, the kids spent the $10,000 immediately and now have to add the taxes to their IRS debt.
So was the “gift” helpful or not?