How does IRS determine if money between family members is a loan or a gift?

Wait so if my wife and I together give my brother and his wife money, we can actually give up to $68,000 per year without filing anything? ($17k x 4 because it's technically from each of us to each of them)? That's way more than I thought! Also, what happens if we DO need to file a gift tax return? Does that mean we actually pay taxes on it?

Yes, you've got it exactly right! The current annual exclusion allows each person to give up to $17,000 to any number of people. So technically, you could give $17,000 to your brother and another $17,000 to his wife. Your wife could do the same. That's how you get to $68,000 total potential gifting between your households without filing requirements. If you do exceed the annual exclusion amount and need to file a gift tax return (Form 709), it doesn't necessarily mean you'll pay gift taxes. The excess amount is counted against your lifetime gift and estate tax exemption, which is currently over $12 million per person. Most people never exceed this lifetime limit, so they never actually pay gift tax even if they have to file the form.

How does it actually analyze text messages? That seems a bit invasive. Does it need access to your phone or something? And how accurate can it really be with just informal conversations?

I'm curious - did it tell you that you needed to charge interest on family loans? I heard somewhere that the IRS requires some minimum interest rate even for family loans, which seems ridiculous to me.

You just upload screenshots or transcripts of the conversations - no need to give access to your entire phone or anything like that. It uses AI to identify key elements like promises of repayment, timelines discussed, etc. It was surprisingly accurate at picking up nuances in how we were discussing the money transfers. The tool did confirm that the IRS expects you to charge at least the Applicable Federal Rate (AFR) for loans, even between family members. If you don't, the IRS can actually impute interest, meaning they'll treat the transaction as if you charged interest even if you didn't, and you could be taxed on that phantom interest income. I was shocked too, but apparently it's to prevent people from using no-interest loans as a way to avoid gift taxes.

How much did it cost? Seems like just another service trying to profit off a broken IRS system. Shouldn't we be able to just call the IRS directly for free?

Does this actually work? I've tried calling the IRS like 20 times about a similar issue with money I gave my kids, and I just get disconnected after waiting for hours. Seems too good to be true that there's a way around this.

I understand the frustration with the system. You absolutely should be able to call the IRS directly for free, but the reality is their phone systems are overwhelmed. What Claimyr does is basically hold your place in line so you don't have to. It's a one-time fee for each successful connection, not an ongoing subscription. I was initially hesitant too, but after wasting entire days on hold, it was worth it to get my tax situation resolved. The advice I got from the actual IRS agent saved me way more than what the service cost.

What's the minimum interest rate you need to charge? And does it need to be a formal loan document or can it just be an email or text message saying "I'll pay you back with X% interest"?

The minimum rate is called the Applicable Federal Rate (AFR), which changes monthly. Right now it's hovering around 3-4% depending on the loan term. The IRS publishes these rates on their website. A text or email is better than nothing, but during an audit, the IRS will look for several things to determine if it's a legitimate loan: 1) a written loan agreement (a formal document is much better than texts), 2) evidence that you're actually making regular payments, 3) the interest rate being at least the AFR, and 4) whether the lender is acting like it's actually a loan by keeping track of payments, etc. The more formal your documentation, the safer you are.

Oh god yes, international transfers are a nightmare! Did your parents have to pay any gift tax in India before sending it? Or is it just the US side that gets complicated?

It was mostly the US side that was complicated. India doesn't have a gift tax anymore, but they do have restrictions on how much foreign currency can be sent out of the country each year. My parents had to declare the purpose of the funds when sending them. On the US side, I had to make sure the gift was properly documented since it was over $100k, which means it had to be reported on my tax return (there's a question about foreign gifts over $100k). Plus I needed to file an FBAR since I temporarily held the money in a foreign account before transferring it here. The paperwork was insane!

This is really helpful advice! One thing I'm still confused about though - if we decide to formalize these as loans going forward, what happens to all the money we've already exchanged without documentation? Should we try to create retroactive loan agreements for those amounts, or just treat them as gifts and move forward with proper documentation for new transfers? Also, when you mention the Applicable Federal Rate being around 4-5%, does that mean we'd actually have to charge each other real interest and pay taxes on that interest income? That seems to complicate things a lot more than just keeping everything as gifts under the annual limits.

Great question! For the money already exchanged, I wouldn't try to create retroactive loan agreements - the IRS generally looks at the intent and documentation at the time of the transaction. Those past transfers would likely be treated as gifts, so you'd want to make sure you haven't exceeded the annual exclusion limits in any given year. If you have, you might need to file Form 709 for those years, but again, likely no actual tax owed. And yes, if you formalize loans going forward, you would need to charge real interest and the lender would pay income tax on that interest. That's why many families just stick with the gift route and keep transfers under the annual limits - it's much simpler administratively. You could also do a combination: smaller regular amounts as gifts, and only formalize larger one-time transfers as loans if they exceed what you're comfortable gifting. The key is being consistent with whichever approach you choose, because the IRS looks at the overall pattern of behavior between family members.