The IRS's gift tax regulations are widely misunderstood. The reality is that unless your gift to your adult child exceeds the current exemption, which in 2018 is $15,000, you don't need to file a Form 709 gift tax report. Also, even if your gift exceeds the current yearly exemption limit – in which case you do have to file a 709 – no tax is due on it unless your accumulated gifts to that child exceed the lifetime exemption, which is a whopping $5.6 million. Other IRS provisions make your having to pay a tax on gifts to your child even less likely.
First of All...
Remember that until your child reaches age 18 (or 24 if she's a student) – at which point the IRS rules for adult children apply – you're free to raise her as expensively as you please. If her middle school costs $45,000 a year, so be it. If she and her equally affluent pals decide Christmas in Chamonix sounds perfect, just buy the tickets and hand over a credit card (if you're raising your child at this level of excess, of course, she probably already has plenty of credit cards). Past 18 (or 24 for students), different rules apply.
How Much You Can Give Your Adult Child Each Year
Once your child's an adult, you can give him a certain amount of money each year without initiating a taxable event. The number goes up from year to year, but in 2018 it's $15,000. Here's some good news: If you're married, both you and your spouse can give that same exempt maximum, so we're now up to $30,000 for 2018. If your child's married, both you and your spouse each can give another $15,000 to your child's spouse. We're now possibly up to $60,000 for 2018. The IRS now accepts the eligibility of same-sex spouses.
More good news: You can do this every year, indefinitely, as long as you keep your donation in any given year within that year's limits, which increase yearly. These gifts do not count against your lifetime exemption. In fact, contrary to what some believe, you don't need to file a Form 709 to document them either. It's your business, not the IRS's, and the IRS agrees.
If You Exceed the Yearly Limit
If for any reason you want/need to give your child more than the current year's exemption limit, you can. The only immediate consequence is that you'll have to file IRS Form 709 to document the gift. But that doesn't trigger a taxable event. Until you pass the lifetime exemption limit, that's all you'll need to do.
Lifetime Gift Tax Exemption
Amazingly, the lifetime exemption limit as of 2018 is $5.6 million. Assuming you and your spouse each give the maximum amount to your child, that's $11.2 million. If you and your spouse give the $30,000 maximum each year for the next 50 years, you won't have begun to touch the lifetime limit. In fact, at $30,000 a year that would take 373 years!
Since you and your spouse you don't have 373 years to do this (but assuming you do have scads of money), you'll probably want to give amounts each year that exceed the limit and therefore count toward the maximum, but over several years' time. If you and your spouse each give the money over a period of 20 years, for instance, can each can give $275,000 every year. After the contribution in Year 20, you'll have reached the maximum lifetime contribution per couple of $11.2 million. Since the lifetime contribution will almost certainly have gone up substantially over 20 years, you'll probably be able to give for a year or two more.
The bottom line: Within anything approaching reasonable gift-giving amounts, it's unlikely there ever will be takes paid on gifts to your children. Your likely obligation is limited to filing a Form 709 in each year that your contribution exceeds the exemption limit.
Information in this article has been derived from reputable secondary sources, such as TurboTax and legal and CPA firms specializing in taxation issues. You should contact your accountant or attorney for information specific to your circumstances.
The only IRS source documents are for the 2017 tax year. From 2008 forward, Congress has subjected both the IRS budget and IRS staff to substantial cuts. The consequence has been that the IRS has fallen substantially behind in updating forms and providing contemporary guidance. It may even be that firsthand IRS guidance on this issue for 2018 won't arrive until the beginning of the 2018 tax season beginning sometime in January 2019.
It's not highly likely, but always possible that IRS guidance on this issue, when it finally arrives, may differ from what has been described above. Check the IRS website for 2018 forms and guidance before proceeding.
- giving money image by TEMISTOCLE LUCARELLI from Fotolia.com