You might want to give your children the world, but you also don't want to pay through the nose in taxes for doing so. Giving money to a child doesn't have to summon the taxman -- as long as you observe the maximum amounts for tax-free gifting and/or give gifts that qualify as exclusions.
Regardless of your child's age, certain rules apply across the board if you want to give money tax-free. As of January 2015, you can give up to $14,000 individually or $28,000 as a married couple to your child annually without paying taxes. However, you must still file Form 709 for amounts above these levels. Furthermore, you can give up to $5.43 million in your lifetime without penalty, but using your exemption will also reduce your estate tax exemption by the same amount.
Types of Gifts
You can give your child a variety of different monetary gifts, including cash, securities, property or money in the form of trusts. The type of vehicle, and not just the amount of money, can impact the tax consequences. For example, when an appreciated property such as a stock is transferred as a gift to a child, the child does not have to pay capital gains tax. However, he will need to do so for any gains if the stock is sold.
Gift Tax Exclusions
Beyond lifetime and annual limits for gifting, certain monetary gifts may be given freely without regard to gift tax limits. Any qualified medical or educational expenses that you pay for your child won't be taxed. However, you must pay the medical or educational institution directly and meet the criteria for acceptable expenses as stipulated by tax forms 709 and 950. Another way to avoid gift taxes for education is to place the funds into a 529 education savings plan.
Minors and Adult Children
Additional tax repercussions may apply, depending on the child's age. The so-called "kiddie tax" on investment income applies to a child under 19 years of age or a student under 24 years old who receive dividend distributions above a given level from a stock gift. As of 2015, the child will be taxed on any amount above $1,050, at the parents' rate. In the case of adult children whom you are still supporting financially, you may qualify for a dependent exemption to reduce your total taxable income.
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