There's often some degree of uneasiness among parents of adult children about the tax consequences of giving them money. But in most cases, there's little reason to worry. The concerns are usually based on a misinterpretation of the applicable IRS rules.
For 2018, the annual exclusion amount for a gift given by one person to another person is $15,000. If you're giving more than that, you'll need to file IRS Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. However, it's unlikely you'll have to pay anything for the amount that exceeds the limit.
What Is a Gift?
What is a gift as the IRS defines it? It can be cash or equities or anything else of value, such as an automobile or a payment on your adult child's behalf to a third party. As the IRS defines it, however, it also includes sales, exchanges or other transfers of goods of any kind where the sales price was less than the fair market value.
For example, you buy a new car and sell your old car, a 2011 Lexus GX 460 Sport Utility 4D, to your adult daughter. According to Kelley Blue Book, the fair market range for the vehicle as of May 2018 is $24,100-$26,158. Being a good parent, you sell it to her for $10,000. According to IRS regulation, you've gifted her the difference between the fair market range and the lesser amount you've sold it for.
The next issue is: how much is that difference? Before you assume it's $24,100 minus $10,000, which equals $14,100, you might want to check with your tax adviser. In reality, there's probably some lesser difference the IRS will accept. If the car has a few dents and scratches, you can probably deduct for that (and it would be a good idea to take a few photos). You might also take the car to a used car dealer and get them to give you a written offer. It might take a little doing, but it's likely to be somewhat less than $24,100 unless you haggle, which, of course, you won't.
This same principle applies to all sales to an adult child that are below the fair market value.
The Annual Exclusion Amount
In the above instance, even if you'd calculated the fair market value at $24,100 and sold it for $10,000, you wouldn't have to file IRS Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, documenting the gift because for 2018 you're allowed an annual exclusion amount of $15,000. Since the gift in the above instance was for $14,100, you don't have to file. There is a fairly common misunderstanding that you have to file Form 709 for gifts in any amount, which is clearly not the case.
Why Mandatory Filing is Rare
The $15,000 annual exclusion for 2018 is for a gift from one person to another. However, if you're married, you and your spouse can each gift your adult child $15,000. If your adult child is married, each of you can give $15,000 to your child and another $15,000 to your child's spouse (same sex spouses are now fully eligible). So, in many cases you can give your adult child's family a total of $60,000 a year. Not only that: you can do this every year! In 10 years, you'd be giving something north of $600,000 because the gift tax goes up each year. In recent years the increases have been $1,000 each year.
You can be very generous to your children by giving them a lot of money year after year without ever filing Form 709.
Gifts that Exceed $15,000
If your gift in a given year exceeds the current exclusion limit, you'll need to file Form 709, but it's unlikely you'll have to pay taxes on the gift. In addition to the annual exclusion amount, the IRS also allows a lifetime exclusion amount. In 2018 this amount is $5.6 million. And the same regulations apply: you and your spouse can give a total of $11.2 million to your child or $22.4 million to your child and their spouse.
What this means is that although you'll have to file every year your gift(s) exceed the annual exclusion limit, you won't actually have to pay taxes on the excess until you've given away millions. Since the IRS doesn't count gifts under the annual exclusion limit against your lifetime exclusion limit, it's unlikely that you'll ever pay taxes on any of those gifts.
In 2018, the IRS budget was cut again; since 2010 the agency has lost over 23 percent of its budget and 14,000 employees. And this comes at a time when the late 2017 Tax Cuts and Jobs Act will require many more hours than usual spent preparing new forms, writing accompanying explanatory notes and then enforcing new tax regulations.
All this is to admit that everything in the above article comes from secondary tax planning and accounting sources, not from 2018 IRS documents. As of May 2018, the only available IRS Form 709 and the accompanying instructions for Form 709 are for tax year 2017. The secondary sources used for the article are reputable and presumably they've had discussions with IRS employees confirming what they've been written. Nevertheless, it would be prudent to revisit the gift tax exclusion matter again after the IRS has finally updated its forms and explanatory notes for 2018. If the IRS doesn't have the manpower to accomplish these updates by the end of 2018 – when you'll probably want to give your gifts to your adult children – you should definitely consult what the IRS considers a "bonafide tax authority," such as a certified public accountant before giving. In such instances, even if the gift and your associated filing violates whatever turns out to be a final IRS ruling, because you've relied on expert advice you're off the hook – there would be no tax penalty.
- Estate PLanning & Elder Law Services: Good News for Givers: Gift Tax Exclusion Goes Up in 2018
- Money Under 30: Gift Tax: Don't Fear Taxes When You Give (or Receive)
- IRS: 2017 Instructions for Form 709
- Center on Budget and Policy Priorities:2018 Funding Bill Falls Short for the IRS
- Intuit: Do I Need to file Form 709 if the Gift Amount Is Less Than $14000?
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