Gifting money to children can bring great joy on both sides of the parent-child fence, particularly when parents are still living to see the financial relief their gift brings. An added bonus is that children will not have to pay income tax on these monetary gifts. Perhaps the best news of all is that the IRS puts a jaw-dropping multi-million dollar lifetime cap on the amount of money that parents can gift each child without incurring any tax liability of their own.
In 2018, over their lifetimes, parents can give a pre-inheritance gift of money to their children totaling $5.6 million – and that’s per parent. This means that a child may receive $11.2 million, which is $5.6 million during each parent’s lifetime that's tax-free to the child as well as to the parents.
Gifting Money to Children
Gifting money to family members follows the same tax guidelines as gifting money to friends. The tax-exempt limits, called exclusions because the amounts are excluded from gift taxes, are divided into three categories: annual exclusions, lifetime exclusions and unlimited exclusions.
Each parent may gift each child up to the maximum tax-exempt limit without even having to report the amount of the gift on an income tax return. And if a parent exceeds the annual exclusion, the amount that is over the yearly limit is still tax-exempt as long as the parent hasn't reached the lifetime limit. You must report any yearly overages on your tax return, but you’ll never actually have to pay taxes unless you exceed your lifetime limit.
Gifting Money Exceptions and Consideration
Exceptions. By giving an inheritance before death, parents are allowed some latitude in the tax-free gift guidelines through unlimited exclusions. If parents make tuition payments directly to their child’s school instead of giving the money to the child, any qualifying educational costs are exempt from the gift exclusion limits. Likewise, if parents pay a medical provider directly for a child’s medical expenses instead of giving money to the child to make the payment, all approved payments are also exempt from the gift exclusion limits.
Consideration. When a parent exceeds the annual gift exclusion, any overages are applied toward the lifetime exclusion. Even though the parent will not owe gift taxes on the lifetime exclusion unless the lifetime limit is surpassed, any amount that taps into the lifetime exclusion allowance will reduce the parent’s estate tax exemption when the parent dies.
2018 Gift Tax Limits
Annual Gift Tax Exclusion. As of 2018, each parent may give each child up to $15,000 each year as a tax-free gift, regardless of the number of children the parent has. If a parent exceeds this amount in a tax year, she must report the overage on IRS Form 709 - United States Gift (and Generation-Skipping Transfer) Tax Return, which is included with the parent's annual tax return.
Lifetime Gift Tax Exclusion. Each parent may give a child up to $5.6 million during the parent's lifetime as a tax-free gift. If the parent has more than one child, this amount could be split up among them.
2017 Gift Tax Limits
Annual Gift Tax Exclusion. In 2017, each parent could give each child up to $14,000 as a tax-free gift, regardless of the number of children the parent had. If a parent exceeded this amount, he must report the overage on IRS Form 709 - United States Gift (and Generation-Skipping Transfer) Tax Return, which is included with the parent's annual tax return.
Lifetime Gift Tax Exclusion. In 2017, each parent could give a child up to $5.49 million as a tax-free gift, or split it between multiple children.
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