There are many misconceptions pertaining to the tax consequences of giving a gift to a child. The most common is that the giver (a parent) is entitled to make a tax deduction of at least a portion of the value of the gift. The use of the term "deduction" technically is a misnomer, although there are some very clear benefits associated with this type of gift. The reality is that when it comes to a gift to a child, the issue is not so much what deduction a person is able to take as a result of the transaction, but when the giver actually will have to pay taxes on the value of the gift. Despite the fact that there is not a tax deduction associated with giving a gift to a child, there are other benefits that can be derived through such a transaction.
Tax Benefit to Parent
The primary tax benefit of a parent (or other adult) that tenders a gift to a child rests not in a deduction, but in the ability to pass money or other property of value to someone else without tax consequences to the parent or other type of giver. For example, for the 2013 tax year, a person can convey a gift with a value up to $14,000 to a child and face no tax consequences whatsoever. A married couple can convey what is known as a split gift to a child with a value up to $28,000 and face no tax consequences.
Tax Benefit to Child
The Internal Revenue Code defines taxable income as being something of value from any source derived. What this means is that any money that a person receives during the course of any given year is presumed to be taxable income. The taxpayer bears the burden of demonstrating that a particular payment or something of value received is not taxable.
In regard to a gift, a person currently can receive a gift from one individual with a value of up to $14,000 with no tax obligation. (If a gift is from both parents, that amount rises to $28,000 total throughout the course of any given year.)
Understanding that the so-called gift to child tax deduction is a misnomer, givers of such gifts have long enjoyed tax benefits nonetheless. During much of the 1990s and up until 2001, a person could extend such a gift or a series of gifts in any given tax year to any number of individuals provided the total value to each individual did not exceed $10,000. Moreover, a husband and wife were able to convey a split gift with a total value of $20,000 to any one individual with no tax obligation.
The amount that legally can be conveyed in this manner without tax consequences has increased over the years to the current $14,000 level for 2013.
A gift to a child annually in an amount up to $14,000 from one parent (or $28,000 from both parents) is commonly utilized as part of an overall estate planning program. This manner of giving provides a solid way for individuals to convey property from one generation to the next without tax consequences. One of ultimate goals of estate planning is to get as much property from one generation to the next with the least amount of tax being paid. Using the gifting process allows a parent with excess money or other assets to transfer this money or other property to a child with no tax consequences during that parent's lifetime --- up to the maximum value permitted each year to each individual child.
The laws governing tax deductions generally and the tax benefits of gift giving more specifically are fairly clear on the surface. Nonetheless, in addressing and dealing with tax issues and estate planning and related matters, the engagement of a tax professional is a wise decision. A tax attorney or tax accountant can assist a taxpayer in ensuring that all applicable laws are complied with when making a gift to a child and in regard to taking advantage of other tax benefits, as well as appropriate deductions.