How to Gift Someone a Car
No matter what its value, the gift of a car is generous to be sure, though perhaps not all that unusual. Most often a car is gifted to a family member, perhaps by a parent or grandparent in celebration of a child becoming a licensed driver or graduating from school, or from one spouse to the other to commemorate a birthday or other special occasion. Perhaps an aging relative who can no longer drive gifts his car to another family member or a family friend.
While giving a car to another person may seem as simple as handing over the keys and signing off on the title, there are important steps to take to ensure the gift is documented, not just for future tax implications, but also to help prevent any misunderstandings between the gift giver and the receiver.
- What to consider before giving someone a car
- How to gift someone a car
- The bottom line
What to consider before giving someone a car
Giving any gift starts with brainstorming what the recipient might like. Chances are, if you are thinking about giving a car to a family member or close friend, you already have an idea that the recipient will be excited about getting a new set of wheels.
Gifting a car you own vs. one you plan to buy, understand the differences
If you’re giving someone a car you own, then consider its reliability since you’ve owned it, as well as its safety ratings, especially if you are giving the car to an inexperienced driver, who is more likely to have a crash. “If the person ends up being on the hook for a lot of unexpected repairs, it could cause friction in your relationship,” said Ronald Montoya, senior consumer advice editor at Edmunds.
If you are buying someone a car, then you should be confident that it is a model the person wants. “It’s very unlikely that any car you buy can be returned, so it should really be something the person likes,” said Montoya. “Start the process of asking what the person wants months in advance, so they have time to forget about it and will be surprised by the gift.” For tips on getting the best deal, here’s how to negotiate the best car price.
Determine if it’s within your budget, and theirs
Even an inexpensive car is still a major gift, so carefully consider how giving away an item worth at least a few thousand dollars could impact you both financially and from a transportation perspective. If you are giving away a car you own, are you completely sure you don’t need it or that you can replace it at the cost you expect, including ownership costs? If you are buying a car for someone else, are you confident you can afford to buy it outright or make the payments over the course of the loan?
Keep in mind, too, that a car may come with significant initial expenses, such as title, tax and registration fees, as well as ongoing costs, including maintenance. “For some people, these costs could be a hardship, so the gift giver should consider the receiver’s ability to pay for these expenses and perhaps consider helping to offset those costs as well,” said Kelly Landry, co-founder and director of financial planning at Cona Wealth in Kansas City, Mo.
Work directly with the dealership sales manager
Purchasing a car on someone’s behalf can be tricky. In many states, you can’t buy a car in someone else’s name unless they are there to sign the paperwork for the title and registration, so you may need to rethink the when and where of how you’ll actually be presenting the gift. “Work directly with the sales manager at the dealership — they should be able to help you avoid any pitfalls,” said Montoya. “Plus they can help create a special experience at the dealership or perhaps can make arrangements for you to bring the car to the person’s home to present the gift before the actual purchase has been made.”
How to gift someone a car
Once you are sure of your choice, you’ll need to take some specific steps to make sure that you are financially protected and that the receiver understands the terms of the gift. To do this, follow these simple steps:
Step 1: Determine the terms of the gift
Because gifting someone a car also means you are giving them significant ongoing expenses, it’s a wise move to at least verbally outline whether you are providing any financial assistance for the costs of ownership. What happens if the receiver decides he doesn’t want to keep the gift? For example, how would you feel if the person immediately sold it? “You definitely want a written agreement if there are any strings attached to the gift, such as if the receiver is required to maintain certain grades in school or keep a job,” Montoya said.
Step 2: Understand the financial implications
Beyond determining if you can afford to give away a pricey item such as a car in the near future, think about the long-term financial implications. For example, could the value of this gift impact your ability to save for a future expense or pay for an unexpected one? How will it affect your lifestyle in general in the coming years?
Also consider where the money is coming from if you’re planning to buy a car for someone. Landry cautioned gift givers of retirement age who plan to use savings to make sure they can afford to deplete those resources. “Expensive gifting later in life doesn’t give you time to make up for lost money like you could when you are in your 40s or 50s,” said Landry.
Step 3: Consider the tax issues
Depending on your state and circumstances of your gift, tax implications can vary. First, there may be sales or use tax in addition to property taxes to pay in order to get a car registered. Then there are state and federal income tax implications to consider. We’ll tackle these one at a time:
Sales or use tax
You’ll most likely have to pay sales or use taxes on a new car. You may not have to pay those taxes on a car you already own and are transferring the title to a relative — in California, for example, you simply fill out a form for exemption from the state’s use tax. However, in either scenario, it will be necessary to pay any property taxes due as well as fees in order to register the vehicle in the driver’s name. State and local laws can vary, so a phone call or visit to the gift receiver’s state Department of Motor Vehicles can clear up what tax, if any, is due.
Federal income taxes
While a gift to anyone other than your spouse is considerable taxable according to the IRS, many times the person giving the gift will not incur any taxes because each taxpayer has annual exclusions available. For 2019, the annual exclusion is $15,000 for a single taxpayer and $30,000 total for a married couple. “However, even if the car you are gifting falls under these exclusions, there are many situations where you need to file a gift tax return, even if no tax is due,” said Georgianne Graves, a CPA based in Guntersville, Ala. Receivers do not have any immediate federal tax obligations, but may if they sell the car in the future. We’ll talk more about this, below.
Finally, people who are buying a car that they are giving as a gift could also have tax implications depending on where the money they are using is coming from. “Tax on the money withdrawn from a bank or a brokerage account could be minimal or substantial, depending on a wide variety of factors. Similarly, money withdrawn from certain retirement accounts, such as a Roth IRA would likely have no tax due, while money from a traditional IRA or a 401(k) would most likely result in the money treated as ordinary income on a tax return,” said Landry. A tax advisor or a financial planner can look at the tax implications and advise you on which option is best for your situation.
State income taxes
In terms of gift taxes at the state level, Graves advised it is important to consult a tax professional who is familiar with your state tax law. “States can decouple from federal regulations, so they can have gift tax laws for a period of time, as well as repeal them, including retroactively,” she explained.
How do you report the gift of a car on your taxes?
The Gift Tax Return is IRS Form 709, but there are so many factors in determining whether to report a car you gave as a gift on your taxes that it’s truly best to consult a tax professional who can ask the right questions for your particular situation. For example, there may be reasons why the form would need to be filed, even though no tax is due.
“Many of these situations arise with married couples who are gifting a car to someone other than each other, even if the car being gifted is titled in just one person’s name,” explained Graves. “For example, you must file a Gift Tax Return regardless of the gift’s value if you are a married couple living in a community property state or if the gift is split with your spouse, regardless of its value. Both spouses would need to file a Gift Tax Return if they made a gift held by them as joint tenants or tenants by the entirety.”
Tax implications down the road
Even if you don’t think a Gift Tax Return is necessary right now, it may be helpful for the executor of your estate after your death. Because estate taxes are calculated on the gross value of the estate, plus taxable gifts and gift tax exemptions over the person’s lifetime, filing Form 709, even when no tax is due, is key in situations where numerous gifts have been given over that person’s lifetime. Since the threshold for estate taxes is $11.4 million in 2019, it’s easy for many people to dismiss the need for filing a Gift Tax Return if no tax is due.
“Even if you can’t imagine ever hitting that amount, what if you end up hitting the lottery or receiving a large inheritance or something?” said Landry. “Many people don’t know the full value of what they will inherit from parents, for example, until those people die and all of their assets are totalled up.”
While the recipient does not need to report the gift of a car on his taxes, having a copy of the Form 709 is also handy when the time comes to sell it. Explained Graves, “All property is considered a capital asset by the IRS. That means when you sell it, you should document any gain or loss on your taxes, regardless of how you acquired it, and having a copy of Form 709 makes it straightforward.”
Step 4: Get the car ready and all the paperwork in order
If you are gifting your used car, make sure the car is in tip-top shape. Montoya advises replacing any tires that are at least six years older, regardless of mileage, and to consider getting the next scheduled maintenance performed. Landry, who gave a Honda Accord with 92,000 miles to her college-age son, had the 100,000-mile service performed in advance. “The service cost me $1,100 and I did not want him to be strapped with that expense,” she said.
In order for any car to be sold, you’ll need to have a free and clear title. That means paying off the loan if you still have one and getting the title released from the lienholder. Keep in mind that this could take several weeks, so that could affect the timing of when you can give the gift. If you own the car outright, then you simply need to locate the title or order a copy from your local Department of Motor Vehicles if needed.
Get an appraisal
Even if the gift of a car falls under the $15,000 individual/$30,000 married couple annual exclusion, Graves still advises that the value of the gift be documented by getting a third-party verification, such as an appraisal, in the event either the giver or the receiver needs to prove it qualified for the exclusion at a later date. “There are many reasons why the IRS might ask for proof down the road, such as if the car is collectible and increases in value or if the gift giver dies and there is a question as to whether an Estate Tax Return needs to be filed,” said Graves.
Step 5: Consider how you want to present the gift
Planning how you want to present the gift of a car may be the most enjoyable part of the process. Consider making it special by adding a big bow or a lavishly-wrapped keychain. Just be sure to let anyone involved know if the gift is a surprise. You don’t want the dealership or anyone else involved to leave a message on your voicemail that the recipient could hear.
The bottom line
While gifting someone a car might be the most impressive birthday present you could ever give or a way to help a child or grandchild when they are just entering the workforce, it does come with a level of financial responsibility for both parties. Take some time in advance to consider the financial implications to you, including if it could affect you negatively in the future, and also think about the ownership costs of the car that the receiver will need to pay. Once you feel confident that everyone can handle the financial impacts, go ahead and make someone’s day.