In the 21st century economy, your children may be struggling with student loans and living expenses while unemployed or under-employed. You may be worried that helping them out financially will bring the IRS to your door demanding gift tax on the money you gave to help out the kids. In most cases, though, that won't be the case.
Tax and Exemption
Almost any help you give your grown children is potentially taxable, whether it's cash to pay the water bill or letting them stay for free in a rental house you own. The IRS, however, waives tax on the first $13,000 in gifts — as of 2012 — and that's per child, not total. If, say, you give each of your three children $12,000 to keep afloat financially, none of it is taxable. The same exemption applies on gifts to anyone, not just to family members.
In some cases, you can give your children even more without paying gift tax. When you're married, your spouse can give an extra $13,000 to each child tax-free — or you can give it all yourself, if your spouse lets you use her exclusion. If any of your children go back to school, money you pay for their tuition is completely exempt from gift taxes. So is anything you give them for medical bills.
A Lifetime of Giving
In addition to the annual gift-tax exclusion, the government offers a second exclusion called the unified credit. The credit lets you exempt more than $1 million in gifts over your lifetime, and also exempts some or all your estate from taxes. If you give your son $20,000 year after year, for instance, the first $13,000 is covered by the annual exclusion. The unified credit then wipes out tax on the excess $7,000 (as long as you're within the $1 million lifetime limit). Unless you give phenomenal amounts or have a substantial estate, you'll never face the taxman.
Even if you use the credit to avoid paying any tax, you still have to report any gifts that exceed the $13,000 limit. You also report gifts if you "split" gifts — i.e., give a gift using your spouse's gift-giving limit as well as your own. File your gift tax return along with your 1040, using IRS Form 709. If you paid for your children's medical bills or tuition, you don't have to file anything.
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.