As children grow into adults, we miss seeing the excited surprise on their faces as they open presents. A child of 5 just has such glee when receiving a gift. It is still possible, however, to give your grown child something they will appreciate. Giving money and your time never seem to get old and have advantages for both you and your children as you grow older.
You May Not Realize
According to IRS.gov, a gift is “Any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return”. With the IRS definition, letting a child stay rent-free in your rental property can be a gift. So can giving your child expensive jewelry or letting them sell something of yours and pocket the profits. Even letting them borrow money with no interest can be considered a gift. All of these scenarios can result in tax liability for you.
Exceptions To The IRS Rule
The good news is that as the recipient, your children never have to pay taxes on gifts from you. For you, as the donor, any gift you give is a taxable gift according to the IRS.
However, there are exceptions to this rule. Below are the ways you can give your children money and assets without tax liability.
Gift Tax Exclusions
Gifts that are not more than the annual exclusion for the calendar year are not taxable. In 2020, when you give a child $15,000 or less in assets each year, you do not pay taxes on this amount. If you have 3 children, you can give each of them $15,000 tax-free. If you are a married couple, you and your spouse can each give each child $15,000. As a couple, each of your 3 children could receive $30,000 without you incurring tax penalties.
If you have college-age kids or even older kids who want to go back to school, this is a way to help them with their life and career in a meaningful way. Paying for their education directly rather than handing them money saves you tax liability and gives you peace of mind knowing what the money is used for.
Paying for student debt later does not qualify for a tax exclusion because you are paying the money to the loan company and not the educational institution. The money you give must go directly to the school and not into your child or another person’s hands first in order to qualify for this exclusion.
Medical Expenses Exclusions
If your grown child has medical bills or is responsible for large medical bills for their own family, they may be in need of help. Medical expenses, especially if someone does not have health insurance or is minimally covered can be burdensome and stressful.
Compared to earlier generations, children born after 1980 are especially prone to have high medical bills and debt due to their likelihood of having no health insurance. Even if they are covered, their deductibles may be high or surgeries may not be covered. Offering to help pay for the birth of a child or a needed surgery could prevent them from carrying a crushing debt for the next decade.
Paying a medical provider directly has no tax consequences for you. With medical debt on the rise in the US, if you have disposable income and are able to help with high medical bills, your children will most likely have real gratitude for your gift.
Gifts to a Political Organization
If you have already reached your gift tax exclusion limit but want to make another gift, consider giving to a political organization in their name. According to Ink.com, “Civil rights/racial discrimination, healthcare, education and employment” are the types of organizations that young people are concerned about and want to give to.
Gifts to Qualifying CharitiesYou can also give to a charity that your child holds near to their heart. Many qualifying charitable organizations are available. You can check out the full list at IRS.gov. This is also a great opportunity to start a conversation with your child about what kinds of charities they find important.
Lifetime Giving Limits
Lifetime giving limits only apply to the amount you give over your gift exclusion amount. If you give more than the gift tax exclusion and end up paying taxes on the extra, that taxable amount is added up each year of your life. This total amount of gifting that is above the gift exclusion over the course of your lifetime is called the Lifetime Gift Tax Limit. This amount cannot be higher than $5.6 million per child. If you are married, you can together give $11.2 million total to each child in overages over the course of your lifetimes. Any gifts to charitable organizations or political organizations are not subject to lifetime giving limits.
No Tax Penalties
As parents, there are many ways to show love to our children with our resources. If you want to give to your children without handing them money directly and worrying about tax penalties, consider doing something fun for all of you together. Pay for a day to an amusement park, a shopping spree at the mall, or a day at a salon. Buy tickets to a game or go-kart racing or to a ball-hitting range. Pay the green fees to golf together or take the extended family to a show. Consider a weekly lunch with the entire family at a nice restaurant or a vacation in which you foot the bill for the vacation home and dinners out. In these ways, you can spend time enjoying your family and showing love and devotion without worrying about taxes.
Consult A Professional
If you are still wondering about what is and is not taxable, talk to an expert on the subject. A knowledgeable estate planning attorney can help you sort through how best to give to your children without incurring tax penalties. Often, making an estate plan to sort through all of the issues with an attorney is the best way to put your mind at ease that you have a good plan for your financial giving. Someone who knows about all of the applicable tax laws for your unique situation can help both you and your children save money in the long run.