Gift Tax And Your Child-In-Law: What You Need To Know

In the United States, the gift tax is a federal tax imposed by the Internal Revenue Service (IRS) on taxpayers who transfer money or property to someone else without receiving anything of substantial value in return. The gift tax is owed by the giver, not the recipient, and there are various exemptions, including gifts to a spouse, tuition or medical expenses, and gifts to qualifying charities.

For the 2024 tax year, individuals can give up to $18,000 per recipient without needing to file a gift tax return or pay gift tax. This is known as the annual exclusion amount or the annual gift tax exclusion. Married couples can combine their exclusions, allowing them to give up to $36,000 per recipient annually.

Gifts above the annual exclusion amount must be reported to the IRS using Form 709, but this does not necessarily mean that gift tax is owed. For the 2024 tax year, individuals can give a total of up to $13.61 million in gifts throughout their lifetime before they start owing gift tax. This is known as the lifetime gift tax exemption or the lifetime gift tax exclusion limit.

Annual gift tax exclusion amount

The annual gift tax exclusion amount is the maximum amount of money or assets that can be gifted to someone without needing to report it to the IRS. For 2024, this amount is $18,000 per recipient. This means that you can gift $18,000 to your cousin, another $18,000 to a friend, and so on, without needing to file a gift tax return. The annual exclusion amount is per recipient, not the total amount of all your gifts.

For married couples, each spouse can give away $18,000 in 2024 without needing to file a gift tax return in 2025. They can also choose to combine their annual exclusions to gift a total of $36,000 to a single person.

It's important to note that exceeding the annual gift tax exclusion limit doesn't mean you have to pay a gift tax. It simply means that you need to submit IRS Form 709 to disclose the gift. The amount that exceeds the annual limit will then be subtracted from your larger lifetime gift tax exclusion.

The annual gift tax exclusion amount can change from year to year. For example, in 2023, the annual exclusion amount was $17,000, and it will increase to $19,000 in 2025.

Lifetime gift tax exemption

The lifetime gift tax exemption is the total amount of money that can be given as gifts during a person's life before the gift tax must be paid. This amount is $13.61 million in 2024 and is used in combination with the annual gift tax exclusion, which is the amount of money that can be given as a gift per person per year without incurring taxes. The annual gift tax exclusion is $18,000 in 2024.

The lifetime gift tax exemption amount can be used strategically to reduce estate taxes by gifting assets to loved ones during a person's lifetime rather than as part of their estate after death. This allows recipients to benefit from the gifts immediately and enables donors to see their gifts improve their loved ones' lives. It also helps reduce the donor's taxable estate as gifts can grow in value in the hands of the recipient rather than the donor.

The lifetime gift tax exemption amount can be used across multiple years. For example, a person can give $18,000 to ten people in 2024, using up $20,000 of their $13.61 million lifetime tax-free limit.

The lifetime gift tax exemption amount is subject to change. It was increased significantly with the passage of the Tax Cuts and Jobs Act (TCJA) and is temporary, only applying to tax years up to 2025. After 2025, the exemption will revert to the pre-2017 level of $5.49 million, adjusted for inflation.

It is important to note that the gift tax is owed by the giver of the gift, not the recipient, and filing a gift tax return does not necessarily mean owing gift tax unless lifetime gifts exceed the lifetime gift tax exemption amount.

Tax implications of supporting adult children

The last thing you need when you're trying to support your adult children is to be worried about paying gift tax on top of everything else. Fortunately, your chances of actually owing gift tax are very low. To set your mind at ease, first, determine if you've given any one child more than the limit for a calendar year.

As of 2024, you can gift your adult child up to $18,000 in a year before you must file a gift tax return. This is per calendar year and does not roll over from year to year. This annual exclusion can change from year to year (it was $17,000 in 2023), so make sure you know what the exclusion amount is for any given tax year.

If you are married, your spouse can also gift an equal amount to the same person. So, a married couple can provide their adult child up to $36,000 of support in a year without triggering any action related to taxes.

However, if you cover a major expense—such as a new car, a down payment on a house, or a honeymoon for a wedding present—it is conceivable you will cross the annual exclusion threshold, particularly if you aren't married. What happens then? Not much. You simply need to submit IRS Form 709 to report the gift to the IRS. Even if you need to file Form 709, it's still unlikely you or your child will need to pay a gift tax on the money or assets.

The IRS uses the information reported on Form 709 to track how much beyond the gift tax exclusion you give to another individual. There is a lifetime maximum tax exclusion of $13.61 million in 2024. So, if over your lifetime, you end up going over the annual exclusion threshold to a tune of more than $13.61 million, the amount you exceed by is subject to a gift tax. The tax rate varies but can be as high as 40% and is paid by the giver, not the recipient.

Other types of payments are not considered gifts and do not count towards the annual exclusion. For example, money paid for tuition, medical expenses, or health insurance premiums on behalf of your adult children are not counted as gifts and need not be reported, no matter how much the bills add up to. Although you must pay the school, hospital or insurance organization directly.

Any amount you pay your adult child, either in your business or for personal services, is not a gift. However, the amount you pay must be reasonable, and the child must have actually done the work. If you pay your adult child in your business, you can deduct the amount you pay them as a business expense.

Your adult child may even be able to contribute to a retirement plan, such as an IRA, if they earn income by working for you. If your child is over age 21, you generally owe payroll taxes if you pay them wages.

Note: Filing a gift tax return doesn't mean you owe gift tax.

Claiming Your Adult Child as a Dependent

If your adult child qualifies as a dependent, you can spend money on them without it being considered a gift for tax purposes.

Your adult child must meet specific IRS criteria to be claimed as a dependent. For example, your adult child must live with you and have less than $5,050 in gross income for 2024 (up from $4,700 for 2023), and you must provide over 50% of their total support.

Your adult child can't file a joint return with a spouse if he or she is a dependent. Your adult child can't be filed as a dependent by you and someone else. They also must be under age 19 or a full-time student under age 24.

Tax-free gifts

Gifts from a donor in excess of $18,000 within one year must be reported to the IRS using Form 709, even if the donor has not exhausted their lifetime gift tax exemption. This form helps track gifts that might impact your lifetime gift tax exemption and ensures proper taxation where applicable.

According to the IRS, a gift is defined as "any transfer to an individual, either directly or indirectly, where full consideration (measured in money or monetary value) is not received in return". This means that any transfer without receiving equivalent value must be reported.

Examples of gifts that generally need to be reported include:

• Down payment for a home
• Direct cash gifts for education or personal expenses
• Real estate or property transfers
• Contributions to a 529 plan for someone other than yourself or your spouse

Not all money transfers are classified as gifts by the IRS. Several types of payments are specifically excluded from being treated as gifts, and thus are not subject to gift tax rules. Things the IRS might not consider a gift include:

• Payments for services, such as wages or professional fees
• Payments for life or health insurance premiums
• Direct payments to educational institutions for tuition
• Direct payments to healthcare providers for medical expenses
• Payments made directly to landlords or housing providers for rent
• Payments made to fulfil legal obligations like child support or alimony

In addition, tuition or medical expenses you pay for someone are not considered taxable gifts. To qualify for the unlimited exclusion for qualified education expenses, you need to make a direct payment to the educational institution for tuition only. Books, supplies and living expenses do not qualify. If you want to pay for books, supplies and living expenses in addition to the unlimited education exclusion, you can make a 2024 gift of $18,000 to the student under the annual gift exclusion.

Gift tax return

The gift tax return is a federal tax on the transfer of money or property to another person. The IRS defines a gift as any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money's worth) is not received in return.

The donor is generally responsible for paying the gift tax. However, under special arrangements, the donee may agree to pay the tax instead.

The gift tax return that needs to be filed is IRS Form 709: U.S. Gift (and Generation-Skipping Transfer) Tax Return. This form is due on April 15 of the following year or the next business day if it falls on a weekend or holiday. Even if you do not owe a gift tax because you have not reached the limit, you are still required to file this form if you made a gift that exceeds the annual gift tax exclusion level.

The annual gift tax exclusion amount for 2024 is $18,000, and for 2025, it rises to $19,000. This is the maximum amount that can be given to a single person without having to report it to the IRS. For married couples, the limit is $36,000 for 2024 and $38,000 for 2025.

If you give away more than the annual exclusion amount in cash or assets (e.g. stocks, land, a new car) to any one person during the tax year, you will need to file a gift tax return. The annual exclusion is per recipient, so you can give the annual exclusion amount to multiple people without having to file a gift tax return.

In addition to the annual gift tax exclusion, there is also a lifetime gift tax exclusion. The 2024 lifetime gift tax exclusion amount is $13.61 million, and for 2025, it rises to $13.99 million. Any amount given over the annual limit is subtracted from the lifetime limit. Once the lifetime limit is exceeded, gift taxes may need to be paid.

The gift tax return helps keep track of the lifetime exclusion. Therefore, if you don't gift anything during your life, you have your whole lifetime exclusion to use against your estate when you die.

Frequently asked questions