Can Grandparents Buy a New Car for a Grandchild Without Paying Gift Tax?

If your old car gives up the ghost, it might sound like a dream come true if your grandparents offer to buy you a new car. For you, it is. Depending on what they purchase for you, however, your grandparents might have some tax decisions to make. If the value of the car exceeds a certain dollar amount, the IRS may require your generous grandparents to pay gift tax on it. There are, however, legal ways to work around this.

The IRS doesn't care when a taxpayer makes a gift, either in his will or during his lifetime: it still wants a piece of the pie when the property changes hands. The gift tax prevents taxpayers from giving away their wealth while they're alive in order to avoid estate taxes later. With some exceptions such as college tuition, the IRS says a gift is anything your grandparents give you for which you don't pay them fair market value. If they buy you a car as of 2019, a gift tax may be due at a rate of 18 to 40 percent on a portion of the car's value.

Luckily, the IRS doesn't care about small gifts. It's the big ones — those that might deplete your grandparents' future estate — that the government is concerned with. The IRS, therefore, allows each of your grandparents to give you $15,000 a year as of 2019 without worrying about the gift tax. If they both want to give you the car as a gift, they can double this amount to $30,000. Only the balance of the car's value over this amount is subject to the taxes. Therefore, if they give you a $30,000 car, no taxes are due. If they give you a $35,000 car, $5,000 of the gift is taxable. If your grandparents aren't married and if one of them gives you a $25,000 car, he's incurred taxes on $10,000 of it -- the difference between the car's value and the $15,000 per person exemption.

The unified credit can also help your grandparents avoid paying a gift tax. The federal government decided that over the course of your lifetime, you may gift up to $11.4 million tax-free, including the value of your estate upon your death.

If your grandparents owe gift tax on your car but don't want to pay it, they can instead opt to apply the tax amount to their $11.4 million lifetime exclusion. Each time they do this, however, it depletes their lifetime credit, lowering the amount of the exclusion that remains available to them for future gifts. It also leaves less of an exemption to protect their estate from paying estate taxes when they die. If your grandparents owe a $5,000 gift tax on your car and apply it towards their lifetime credit rather than paying it, they will have only $11,395,000 worth of credit left. While this leaves more than enough wiggle room for most, it could impact your grandparents if their estate is a large one or if they give gifts frequently.

If your grandparents want to give you a luxury car worth more than the available annual exemption, they can avoid incurring any gift taxes if they remain the registered owners of the vehicle. The taxes only apply to gifts when ownership actually changes hands. After all, if they retain ownership of the car but give it to you for your use, it technically still belongs to them, not to you. Their estate may have to pay taxes on the car if ownership of it passes to you when they die, but keeping the car in their name avoids the gift tax while they're living.