If you’re like a lot of parents, you want to do more for your child than just give him holiday and birthday gifts. You may want to give him gifts throughout the tax year. Under Internal Revenue Service (IRS) regulations, you can give your child gifts of cash and property without worrying about paying gift tax. Using your gift tax credit and unified credit will help you avoid a tax trap.
Gift Tax Credit
Every year, the IRS adjusts the gift tax credit to keep up with inflation. It renews on January 1, so in theory you can make tax-free gifts every year. As of 2013, the max was $13,000 per child, per parent. That means your child could get as much as $26,000 in tax-free gifts from the two of you. However, neither you nor you spouse can take a deduction for the gifts you give.
Tax Deductible Property
You can use your gift tax credit to give your child real property for either personal or commercial use. If you give your child a home, he can use the mortgage interest and property taxes he paid to reduce his taxable income. If you give away income property, she can deduct the mortgage interest, property taxes, repairs and maintenance expenses from the income the property produces. Your child can take the tax deductions as long as he owns the property.
Since most real property costs more than $13,000, you're responsible for paying gift taxes on the difference. For example, if you gift your child a single family home that costs $150,000 and use your $13,000 gift tax credit, you could still owe tax on the remaining $137,000. You can offset some of that if you use your unified credit, which was $1,772,800 for 2013. However, you reduce your unified credit each time it's used. For example, if you offset $20,000 of gift tax, your unified credit decreases to $1,752,800 ($1,772,800 minus $20,000).
You don’t have to give your child a lump-sum gift to use the annual gift tax credit. If you pay your child’s mortgage as a gift or give them money, you can deduct that amount from the $13,000 credit. For example, let’s say you make your child's $1,000 monthly mortgage payment in March, April, June and July and give him $1,500 in December. That $5,500 comes out of the credit, and you'll still have $7,500 to claim later. If you don't use the remaining $7,500, you can’t roll it to the next year.
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