If you have the wherewithal to start your children off with a bang, you can give as much as $14,000 a year to each child (indeed, to as many individuals as you want) without any tax consequences to you.
So you and your spouse can give a total of $28,000 annually to your children, grandchildren, stepchildren or anyone else. (If you exceed the annual limit, you'll need to file a federal gift tax return but it's highly unlikely you'll actually have to pay any tax on the gift.)
A good vehicle for such a gift to a child is a custodial account opened under the Uniform Transfer to Minors Act (UTMA) or the Uniform Gifts to Minors Act (UGMA).
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To open one of these accounts, simply tell a bank, brokerage or mutual fund company that you want to do it. You'll get a standard form to fill out. An adult must be appointed to act as the custodian of the account -- this could be you, your spouse, or a trusted friend or relative.
Here's what else you need to know about custodial accounts:
-- The custodian has the power to invest and withdraw funds for the benefit of the child, but the money can't be used to pay for items considered support obligations of the parents. Any income used for the child's support could be counted as taxable income to the parents.
-- Income earned by the account will be taxed to the child, but see the discussion below about the "kiddie tax."
-- Once the child reaches the age of majority -- usually 18 or 21 -- he or she gets full control of the money in the account.
-- Your gift is irrevocable. You can't legally take it back under any circ*mstances, even if you run into financial difficulty.
-- The gift may haunt your estate. If you are both donor and custodian, and you die before the child reaches majority, your gift would be considered part of your estate for federal tax purposes. For the vast majority of people, that doesn't matter, since their estates are not large enough to be targeted by the federal estate tax. If your estate is worth millions, though, this is an argument for appointing someone other than yourself as custodian.
Setting up a trust is a way to leave money to your children while controlling how it is to be invested, spent and distributed to them. Testamentary trusts take effect upon your death and can be changed or withdrawn while you're still alive. A revocable living trust is in effect while you're alive.
A irrevocable trust allows you transfer the ownership of property perhaps creating income and estate tax advantages -- but maintain control in the meantime. You choose the trustee and specify what happens to the money placed in the trust.
Unlike in custodial accounts, money held in trust needn't be transferred to the beneficiary at any specific age. You can choose to turn over all of it when your child reaches 21 or spread out payments over the child's adult life.
For any account you open for your child, use the child's social security number as the tax identification number. This will ensure that the interest will be taxed to the child.
To prevent parents from giving assets to children to reduce their own tax bill, Congress created a set of rules known as the "kiddie tax." Here's how it works: The first $1,050 of investment income (interest and dividends, for example) is tax-free to children. The next $1,050 is taxed at the child's rate -- presumably 10%, which is the lowest tax bracket. Investment income over $2,100 earned by a child is taxed at the parents' presumably higher rate (as high as 39.6% in 2015).
When the kiddie tax was created, it disappeared when a child turned age 14. But over the years, Congress has ratcheted the age upward. Now, the kiddie tax also applies to children who are under age 19 and to full-time students under age 24 (unless they earn enough from a job to cover more than half of the cost of their support).
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FAQs
Give financial assets through a Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) custodial account. These accounts allow you to gift and transfer any amount of money, securities, and even property to a minor.
How can I give money to my child without paying taxes? ›
Anyone can open a 529 savings account on behalf of a beneficiary, but typically they're opened by parents or grandparents. The funds in the account grow tax-deferred and, as long as the funds are used for qualified educational expenses, such as tuition, books, supplies and room and board, withdrawals are tax-free.
What is the best way to gift money to an adult child? ›
Using trusts for gifting to family
You can use a trust to give money while you're alive, or to distribute your estate after your death. In some cases, using a trust can allow you to give to your children tax-free, while retaining limits on how the money is used or when they can access it.
What is a cute way to give money as a gift? ›
Top 10 fun ways to give money 🎁
- A money pizza, with bills as “slices” and coins as “toppings.” Use a normal pizza box as the gift box!
- A diploma made of cash to celebrate a graduation.
- A candy bar made of money.
- A box of chocolates with cash instead of treats.
- A money rosette or money wreath.
- A money cake or donut.
The primary way the IRS becomes aware of gifts is when you report them on form 709. You are required to report gifts to an individual over $17,000 on this form. This is how the IRS will generally become aware of a gift. However, form 709 is not the only way the IRS will know about a gift.
Can I transfer 100k to my son? ›
Can my parents give me $100,000? Your parents can each give you up to $17,000 each in 2023 and it isn't taxed. However, any amount that exceeds that will need to be reported to the IRS by your parents and will count against their lifetime limit of $12.9 million.
Can I give my daughter $50,000 tax-free? ›
Bottom Line. The exclusions to the federal gift tax mean you can probably give $50,000 to each of your children without owing any tax. Since a gift of that size is more than the current annual exclusion of $18,000, you would have to file Form 709 to report the gift to the IRS.
What is the IRS form for gifting money to a child? ›
Use Form 709 to report: Transfers subject to the federal gift and certain generation-skipping transfer (GST) taxes.
Do I have to report money my parents gave me? ›
At the federal level, assets you receive as a gift are usually not taxable income. However, if the assets generate income in the future (for example, interest, dividends, or rent), such income will almost certainly be taxed.
How can I give my children money? ›
Many parents or grandparents give the gift of premium bonds for children. Some decide to open a child's savings account.
There are 2 primary methods of transferring wealth, either gifting during lifetime or leaving an inheritance at death. Individuals may transfer up to $13.61 million (as of 2024) during their lifetime or at death without incurring any federal gift or estate taxes. This is referred to as your lifetime exemption.
How do I legally gift money to my family? ›
Giving cash is the easiest and most straightforward way to accomplish gifting money to family members. You can write a check, wire money, transfer between bank accounts, or even give actual cash. You know exactly how much you are giving, making it easy to stay under the $18,000 annual gift tax exclusion.
How to wrap money as a gift for kids? ›
You're going to need a lot of one for this one! Tape bills together end to end and roll them up. Place the roll inside a small gift box with a slit cut in the lid. Add a note with the words "pull me" to the end of the roll and allow it to poke out the top of the box to create a seemingly endless stream of cash.
How to safely send money as a gift? ›
A check or money order provides a secure way to give money. Your gift can be tracked and voided if lost or stolen, which offers an added layer of safety. Another benefit is the convenience. You can write a check from your bank account and money orders are widely available at banks, retail stores and more.
How do you politely give money? ›
Include a Heartfelt Note
No matter how you gift money—even if it's just a Venmo—make sure your recipient knows just how much they're loved and appreciated. "Include a note to the person that shows that you've given this some thought, and that there's meaning behind it," Swann says.
How much money can be legally given to a family member as a gift? ›
A gift tax is a government tax imposed on those who give money or property to others in exchange for nothing (or less than total value). There is typically a tax-free gift limit to family members until a donation exceeds $15,000 (jumping up to $16,000 in 2022). In these instances, the IRS is usually uninvolved.
Does gifting money to your children reduce your taxable income? ›
May I deduct gifts on my income tax return? Making a gift or leaving your estate to your heirs does not ordinarily affect your federal income tax. You cannot deduct the value of gifts you make (other than gifts that are deductible charitable contributions).
What are the IRS rules for gifting money to family members? ›
How the annual gift tax exclusion works. The annual gift tax exclusion is a set dollar amount that you may give someone without needing to report it to the IRS. The threshold is typically adjusted to account for inflation each year. The 2024 annual gift tax exclusion is $18,000, up from $17,000 in 2023.
Is it better to gift or inherit money? ›
From this perspective, if you are inclined to give, you should gift as much as you can comfortably afford during your lifetime, while remaining aware of the available step-up in capital gain basis for inherited assets. So, gift your assets that have minimal gains and save your most appreciated assets for inheritance.
