Children often receive cash gifts from parents, friends and other family members for special occasions like birthdays, Christmas and graduations. Cash gifts and gifts of physical goods and assets like cars are subject to federal tax laws. The gift tax forces givers of gifts of significant value to pay taxes on the value of gifts given.
Gift Tax Basics
The gift tax is closely related to the estate tax. Estate taxes take a portion of the value of a person's estate (all of his assets) after he dies. The gift tax is a way that the federal government can collect taxes on funds that people give away to their children and other beneficiaries before death. If there was no gift tax, taxpayers could simply give all of their assets away before death to avoid the estate tax.
Gift Tax Exclusion
While both cash and non-cash gifts made to children are subject to the gift tax, the tax code allows for sizeable gift tax exclusions. According to the IRS, there is an annual exclusion of £8,450 for each recipient of gifts. In other words, if you do not give a child more than £8,450 in a year, you are not subject to the gift tax. The exclusion applies to each donor, so married couples can give £16,900 in cash tax-free to as many recipients as they like.
In addition to the annual gift tax exclusion, there is a lifetime gift tax exclusion that allows for gifts that exceed the normal £8,450 limit to be made tax-free. TurboTax states that gifts made in 2010 were subject to a £650,000 lifetime exclusion, which increased to £3,250,000 starting in 2011. In other words, you can make gifts that exceed the normal £8,450 exclusion up to £3,250,000 before ever incurring gift tax. The drawback of exceeding the normal £8,450 limit is that each dollar given up to the £3,250,000 limit reduces the size of your estate tax exclusion.
Considering the exclusion limits on cash gifts, only those with significant personal assets have to worry about incurring gift taxes by giving cash to children. Gift tax and estate tax rules can change over time, however, so exclusion amounts may increase or decrease in the future.