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Your adult children have needs and dreams, and you can help. You can give your time baby-sitting grandchildren or helping them make repairs around the house. You can even give advice, but if you give much money to your adult children, you’ll have to file a gift tax return with the Internal Revenue Service. You may not owe taxes, but the IRS subtracts the money you give now from your lifetime total.
If you give money or property to your children and don’t get something of equal value in return, the IRS calls it a gift, whether you designate it as a gift or not. Each year you can give your adult children some money without filing a gift tax return or otherwise reporting the gift to the IRS. This is the annual exclusion. For example, the 2012 annual exclusion was $13,000. If you give a gift of a future interest, you can’t claim it in your annual exclusion. A gift of future interest is one for which use or enjoyment begins at some point in the future. You can also claim an educational exclusion for gifts for tuition or a medical exclusion for medical bills and skip the gift tax return.
You and your spouse can split a gift to a child, allowing you to double the annual exclusion. You must agree to split the gift. If the total gift exceeds the annual exclusion amount, you’ll each have to file a gift tax return. IRS Form 709 gift tax rules require that you report your gift-splitting on each return.
You can give a total of $26,000 to each grown child each year without reporting it to the IRS if you’re married and use gift-splitting and the annual exclusion. You can give another $26,000 to your child’s spouse, if he’s married. You can pay tuition directly to a college or university for your children or grandchildren and claim educational exclusions. You can also pay medical expenses directly to a medical facility and exclude those expenses from your gift tax. So you can give your adult children a significant amount of money without filing IRS Form 709 or paying any taxes, but you have to know the rules and follow them.
If you owe the IRS gift taxes because the money you’ve given during the tax year exceeds the exclusions, you can claim a unified credit and avoid taxes. The unified credit is a lifetime figure adjusted for inflation that changes periodically. The unified credit figure is $1,772,800, exempting $5,120,000 from tax for 2012 taxes. After you subtract the annual exclusion and any educational or medical exclusion, subtract your excess gifts, including future interest gifts, from the unified credit.
Each time you file a gift tax return, you’ll count what you previously subtracted from the unified credit total along with what you’re subtracting this tax year. Although you pay no gift taxes up to the unified credit limit, this provides an accounting for the IRS if you try to give away your estate before you die.
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