Considerations to Make Before Gifting a Car
Knowing that your teen will have a reliable means of transportation when they head off to college several hours away — or when they commute back and forth to the local community college — can really take the stress out of saying goodbye as they begin their new journey.
Gifting a car to a teen who is heading off to college happens a lot in families. This could mean passing down a used vehicle from a generous uncle, a parent upgrading their own vehicle and passing on the used one, or the new graduate being gifted a brand-new car. But when gifting a car to a family member, there are considerations to factor in — making sure the vehicle can be transferred, following state rules about gifting vehicles, and paying any taxes owed at the state and/or federal level.
Ensure the Vehicle Can Be Transferred
First of all, when you gift a vehicle, you have to make sure that your vehicle title can be transferred to the recipient's name.
In order to do a transfer of title, the person who gifts the car must be the owner on the vehicle's title. And there cannot be any liens on the title (a lien means the car can be used as collateral for debts owed).
Follow Your State's Department of Motor Vehicles (DMV) Rules
Once you've determined that you can gift the vehicle, your next step is to follow all state rules that have to do with gifting a car to someone — in this case, an eager college student. Each state has different rules for how to complete a transfer to a family member, so you'll want to look up how to transfer a title at your specific state's DMV. The following general requirements are found in most states:
- Both the donor and the recipient will need to complete the transfer section on the back of the car's title document. You'll need to know things like the odometer reading, and fill in "gift" where it asks for the sale price.
- The recipient then needs to take the title into the DMV, and show proof of car insurance before taking ownership of the vehicle's title.
- The recipient will need to pay a transfer fee.
Pay Any Taxes Owed at the State and Federal Level
When you gift something of value to someone — even an immediate family member — both the person who is making the gift and the recipient have potential state and federal tax consequences.
At the federal level, the Internal Revenue Service (IRS) sees any type of gift as taxable to the person doing the gifting. However, there are many exclusions to this — and one in particular, the annual exclusion limit, excludes many givers from having to pay a gift tax on vehicles. As long as the gifted vehicle has a fair market value (FMV) of less than the annual exclusion limit of $15,000 per recipient, or a total of $30,000 if you're married, per recipient, then you would not owe a gift tax. You can check with a service like Kelley Blue Book to find your car's value. Check with a tax advisor, or call the IRS about your individual situation to figure out if the giver will need to fill out IRS Form 709: United States Gift (and Generation-Skipping Transfer) Tax Return.
Whether or not the recipient will need to pay taxes at the state level depends on if the family member who gifts it to you is considered to be "immediate," according to your state laws. For example, in Connecticut, an immediate family member is defined as, "mother, father, sister, brother, son, daughter, husband, wife or civil union partner." So, if an uncle donates a car to his nephew, then the student would have to pay sales tax/excise tax. Check out your state's DMV for more information.
Gifting a car to your up-and-coming college student will surely make their life easier as they make this big transition to living on their own. Just make sure you both understand the rules, process, and potential taxes involved when doing so to make for smooth roads ahead.