Give Tax-Free Money to Your Children

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You’re doing well financially and want to share the wealth with your kids, or maybe your children are struggling and you want to help them. Either way, you want to give them money without Uncle Sam taking his piece.

But how can you gift money to your children and grandchildren without the tax burden? There are ways to avoid taxes. But you first must know how the taxes and exclusions work.

How Taxes and Exclusions Work

First, it’s essential to know that the tax liability incurred when giving a monetary gift is on the donor, not the recipient.

Potential taxation occurs during life and death. For example, estate tax, if necessary, is paid from the deceased donor’s estate.

But how much is the donor taxed for gifts?

With a gift tax, you’re allowed to give a specified amount per person per year. You also have a lifetime gift tax exclusion. If you go over this, you'll be taxed, or if you pass, the taxes will be paid from your estate.

How Gift Tax Is Excluded

When you make a gift in any one year, an amount is excluded from taxes. The exclusion is $18,000 per person for 2024, an increase from $17,000 in 2023.

That means if you have three children, you can give each one of them $18,000 in one year without being taxed.

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If you are married, you and your spouse can do “split gifts.” This means each spouse can give $18,000 per child per year. That’s a total of $36,000 per recipient in one year. And these amounts are tax free.

You must file Internal Revenue Service (IRS) Form 709, which is a gift tax return. This applies to any overage of the excluded gift amount.

How Lifetime Gift Tax Exclusion Is Applied

You must also be aware of the lifetime gift tax. The lifetime gift tax is $13.61 million for 2024. Any amount over the annual gift tax of $18,000 (or $36,000 for married couples) per year is applied to the lifetime gift tax exclusion.

For example, if an individual gave your daughter $60,000, $18,000 would be the excluded amount for the year, but $42,000 would be applied to the lifetime gift tax. You will be taxed on the excess if you go over the lifetime gift tax exclusion of $13.61 million. If you have passed, the estate will be taxed. Estate gift taxes are 40 percent.

Most people will never go beyond the $13.61 million, but the IRS requires the Form 709 to keep a running gift total.

Tax-Free Gifting Options

Your granddaughter is going to college, and you want to help.

This is especially good timing to help since the new Free Application for Federal Student Aid (FAFSA) rules for financial aid have eliminated the income restriction for gifting toward a student by a grandparent. In the past, they penalized students when they received help from their grandparents.

Since the stipulation is gone, you’ve decided to help. So, you decided to write a check to your granddaughter for $20,000. You’ve just gone over the $18,000 gift deduction.

Instead, to avoid taxes, you must write the check to the educational institution and send it directly to where your granddaughter will attend. As a direct payment, it doesn’t count against the gift exclusion.

The same goes for medical expenses. If your child or grandchild incurs expenses over $18,000 and you want to help them out, you must make the payment directly to the medical facility or healthcare provider. You cannot send the payment to your child or, it will be over the gift exclusion, and it will apply to your lifetime gift amount.

529 Savings Plan Avoids Taxes

Think of a 529 savings plan as a retirement plan. Except in this case, it’s used for education. The advantage of a 529 is the money grows in your account and is not subject to federal income taxes.

But under federal tax rules the contributions must be used for higher education. Some expenses it is used for are:

• tuition
• books
• room and board

Up to $10,000 a year can be used for K–12 tuition.

You can front load the gift.

For example, in 2024, you can give $90,000 to an account in year one. That way you don’t have to spread it over five years. A married couple can give $180,000.

Tax-Free Gifts

Depending on if you’re married, you can give up to $36,000 as a gift or $18,000 if you are single per year. This applies to as many people as you wish. And it includes both family members and friends.

Your child’s tuition can be exempt from the $18,000 if you pay the school directly. The same goes for medical expenses, you must pay the health provider or healthcare facility directly to avoid lifetime gift taxes.

Before gifting money to your children or grandchildren, consult a tax attorney or CPA. This is especially necessary if you have a large estate.

The Epoch Times copyright © 2024. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.