Gifting money or assets to your children can be a powerful way to help them financially, whether it's for college tuition, buying a first home, or just providing a financial cushion. However, it's essential to understand the rules surrounding gifts, particularly the tax implications and what counts as a gift under IRS guidelines.

In this post, we will summarize what qualifies as a gift, strategies for maximizing your gift’s impact, and key considerations when assisting your children financially at different points of their lives.

UNDERSTANDING WHAT QUALIFIES AS GIFTING

The IRS defines a gift as any transfer of money, property, or assets where the recipient gives nothing (or less than full value) in return. Here’s what you need to know:

Annual Exclusion: As of 2024, parents can gift up to $18,000 per year to each child without filing a gift tax return. If both parents gift, this amount doubles to $36,000 per year per child. This amount is subject to change over time.
Lifetime Exemption: Beyond the annual exclusion, there is a lifetime gift and estate tax exemption, which is $13.61 million per individual in 2024. Gifts exceeding the annual exclusion count against this lifetime limit. This amount is subject to change over time.
Educational and Medical Exclusions: Payments made directly to an educational institution for tuition or to a medical provider for qualifying expenses are not considered gifts and do not count toward the annual exclusion or lifetime exemption.

Understanding these rules helps you maximize your giving while minimizing potential tax burdens. For example, if you’re paying your child’s college tuition directly to the institution, that payment is not subject to gift tax.

WHAT ARE CONSIDERED GIFTS?

When parents transfer money, property, or other assets to their children without expecting anything in return, these transfers are generally considered gifts under U.S. tax law. The IRS has specific guidelines on what qualifies as a gift and the implications of such transfers.

Monetary Gifts:

Any direct transfer of money from a parent to a child is considered a gift. This includes cash, checks, or transfers via electronic methods like bank transfers or payment apps. If the amount exceeds the annual exclusion limit, the excess amount may be subject to gift tax and needs to be reported on a gift tax return (Form 709)

Property and Assets:

Real Estate: If a parent gives a piece of real estate, such as a house or land, to their child, it is considered a gift. The fair market value of the property at the time of the transfer is what counts for gift tax purposes.
Securities: Transferring stocks, bonds, or other securities to a child is also a gift. The value of the securities at the time of transfer is used to determine if it exceeds the annual exclusion.
Personal Property: Gifts of valuable personal property, such as cars, art, jewelry, or collectibles, are also considered gifts if given to a child.

Forgiving a Loan:

If a parent forgives a loan they made to their child, the forgiven amount is treated as a gift. This is because the child effectively receives a benefit (the debt cancellation) without providing anything in return.

WHAT ARE NOT CONSIDERED GIFTS?

When it comes to transferring money or assets to your children, certain transactions are not considered “gifts” under IRS guidelines. Here are some examples of what is not considered a gift to children:

1. Payments Made for Educational or Medical Expenses

Educational Payments: If you pay tuition directly to an educational institution on behalf of your child, these payments are not treated as gifts and do not count toward the annual gift tax exclusion. This exemption applies only to tuition and not to other expenses like books or room and board.
Medical Payments: Payments made directly to a medical provider for your child’s medical expenses are also not considered gifts. This includes payments for services such as hospital care, surgeries, and medical treatments.

2. Support Provided as Part of Parental Responsibility

Basic Living Expenses: Money spent on food, clothing, shelter, and other essentials for a minor child is generally not considered a gift. These are considered part of a parent's responsibility to support their child.
Housing Provided by Parents: Allowing your child to live in your home without charging rent is not considered a gift, as it falls under parental support rather than a formal transfer of assets.

3. Payments That Benefit You

Shared Expenses: If you and your child share expenses, and you pay for something that benefits both of you (like a vacation you take together), it is not considered a gift, as it provides a mutual benefit.

4. Transfers Made in the Ordinary Course of Business

Payments for Services: If you pay your child for services they provide (such as working for a family business), this payment is considered compensation rather than a gift. Proper documentation and compliance with employment laws are required.
Debt Repayment: If your child repays a loan you made to them, that repayment is not a gift, provided that the loan was legitimate and documented with a written agreement.

ADDITIONAL CONSIDERATIONS

When gifting to your children, it's important to keep a few additional points in mind:

Documenting Gifts: Always keep detailed records of gifts, especially if they approach the annual exclusion or involve large sums. Proper documentation can help avoid disputes with the IRS.
- It’s ok to gift above the annual limit as long as it is documented and you aren’t worried about using up your lifetime exemption!
Impact on Financial Aid: Significant gifts can affect your child’s eligibility for financial aid. Assets held in the child’s name or large cash gifts could reduce the amount of aid they qualify for.
Estate Planning: Gifting can be a strategic part of your estate plan, helping to reduce the taxable value of your estate. Consult with a financial planner or estate attorney to ensure your gifts align with your broader estate planning goals.

MAKING THE MOST OF GIFTING

Gifting to your children is a meaningful way to support them financially, but it’s important to do so wisely and appropriately. Understanding the rules and using strategic gifting methods can help you maximize your gift's impact while minimizing tax consequences.

If you're considering a significant gift or need advice on the best way to support your children, we're here to help. Contact us today for personalized financial planning guidance to ensure your gifts are both generous and tax-efficient.

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Guide to Gifting Rules for Parents