Gift Tax Implications of Supporting Your Adult Child
With so much change over the last year, if you are supporting adult children financially, you are not alone. Some parents have found that their adult children have moved in with them, following a loss of a job or health issue. It's taking their children longer than expected to get back on their feet.
This change is already a lot to handle, and gift tax is probably the last thing to cross your mind.
What is considered a gift?
Have you noticed the borrowed and never returned clothes, food disappearing from the fridge, and the tank on your car strangely empty? The things your children do may frustrate you and significantly add up over time, but the IRS is not interested.
The IRS will take note of large amounts of cash being transferred to your child, or gifts of expensive jewelry, a car, or a vacation home.
What is gift tax?
If you gift money or property to another person (who is not your spouse), you may have to pay a federal tax on it. Most people will not owe any gift tax unless they exceed the lifetime exemption amount.
How much you can gift per calendar year?
1. You can give each child up to $15,000 in 2021 before you have to file a gift tax return.
2. If you are married, you and your spouse can both make gifts, meaning the maximum gift one couple can give is $30,000. This is called gift splitting and a gift tax return will need to be filed.
3. If your child is married, and so are you, you can give $60,000 to your child and their spouse.
Lifetime gifting can help Pennsylvania residents avoid the 4.5% inheritance tax your estate would pay if your children inherited those assets from you after death.
Gifting your child more than $15,000?
If you gift more than $15,000 you will need to file Form 709 (United States Gift and Generation-Skipping Transfer Tax Return). However, until your total gifts reported on gift returns reach $11.7 million for 2021, you will keep the IRS out of your hair. This high exemption amount avoids most people from paying taxes.
Does the person who receives the gift pay taxes?
Usually, no. Gifts your recipient receives are typically not taxed at the federal level. However, if they make any income from that gift, even if it is interest earned in a savings account, they may be liable to pay tax on that.
If you pay directly to an educational institution or medical provider and not your child, this will not be allocated against the annual exclusion of $15,000 and does not reduce the lifetime credit. However, paying off a student loan would not count for the exception unless you were a co-signer on the loan.
Paying your adult child from your business
If your child works in your business and you pay them from your business, it is not considered a gift. You can also deduct the amount you pay as a business expense and lower your tax bill. This payment does not go towards your gift tax exemption.
What are President Biden’s proposed changes?
President Biden has proposed restoring the estate and gift taxes to their 2009 levels which would be $3.5 million per person for the estate tax, $1 million for the gift tax, and a top rate of 45%, increased from the current flat rate of 40%.
Please reach out to Adviso Wealth for more information on the above, or questions on gifting between spouses, making legal support payments, or donations to charity.
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