Partnership LLC - What's the maximum passive income we can distribute to our daughter in college?

Thanks for the explanation. We definitely don't want to make her a partner right now. So if we understand correctly, we can each give her $18,000 (total $36,000) without any gift tax reporting. What happens if we want to give her more than that? Would we just need to file a form, or would we actually owe taxes on the additional amount?

You're welcome! You're right about the $36,000 combined annual exclusion without needing to report. If you give more than that amount, you'd need to file Form 709 (Gift Tax Return), but you still wouldn't necessarily owe gift taxes immediately. Each person has a lifetime gift and estate tax exemption ($13.61 million per person for 2025). Gifts over the annual exclusion amount count against this lifetime exemption. So if you give your daughter $50,000 in a year, the excess $14,000 would reduce your lifetime exemption, but you wouldn't pay gift tax until you exceed that very large lifetime amount.

This sounds interesting. Does it actually look at your specific situation or just give generic advice? I'm wondering if it would help with S-Corps too since we're considering converting our LLC to an S-Corp next year.

I'm a bit skeptical about these online tax tools. How does it compare to just talking to a CPA? We paid our accountant like $400 for an hour consultation on something similar and got pretty detailed advice.

It actually analyzes your specific documents and tax situation - not just generic advice. You upload your relevant tax docs and business information, and it gives personalized recommendations. I was surprised by how detailed it got with our specific circumstances. For S-Corps, yes, it absolutely handles those! It showed us the pros and cons of different entity structures including partnership vs S-Corp scenarios and the tax implications of each for passing income to family members.

Wait, there's a service that waits on hold with the IRS for you? How much does that cost? Last time I called I was on hold for literally 2 hours and then got disconnected.

This sounds too good to be true. The IRS phone lines are notoriously impossible to get through. Are you saying this service somehow jumps the queue or something? I'm doubtful they can do anything I couldn't do myself with enough patience.

They don't charge you until they actually get someone on the line and connect you. I don't remember the exact cost, but it was worth every penny considering I had already wasted hours trying to get through myself. No, they don't jump any queue - they just wait on hold so you don't have to. They have a system that monitors the call and alerts a representative when the hold music stops, then they call you immediately to connect. Basically they're doing the waiting for you.

That's a good suggestion, but she's already halfway through college so I'm not sure how much benefit we'd get from the tax-free growth at this point. Would it still make sense to set one up with only 2 years of college left?

Good question! Even with just 2 years left, a 529 plan can still be beneficial. First, it gives you a way to transfer more money at once without gift tax implications. Second, many states offer income tax deductions for 529 contributions, so you might get an immediate tax benefit. If there's money left after she graduates, you have options. You can keep it there for potential grad school, transfer it to another family member, or use it yourself for qualified education. The worst case is taking a non-qualified distribution, which means paying income tax plus a 10% penalty on the earnings portion only - not the whole amount.

Just be careful with this approach. The IRS looks closely at family businesses that suddenly put family members on payroll, especially kids in college who aren't clearly providing services. Make sure you have solid documentation showing actual work being performed, regular payments (not just lump sums), and pay that's comparable to what you'd pay a non-family member.

This is extremely helpful! We're paying about $42,000 per year for her tuition and housing. If we pay the school directly, that wouldn't count toward the gift tax limits at all? And we could still give her additional money up to the $36,000 combined annual exclusion for living expenses?

Exactly! Direct payments to educational institutions for tuition are completely exempt from gift tax. However, note that only tuition qualifies - not room and board, books, etc. Those would still fall under your annual gift exclusion. So yes, you could pay her tuition directly to the school (let's say $30,000) with no gift tax implications, PLUS give her up to $36,000 ($18k from each parent) for other expenses. That's a total of $66,000 you could transfer for her benefit without any gift tax reporting requirements.