As a parent, you may be interested in giving money to your child to help him out from time to time. While this is generous, you could have to worry about paying taxes on your gift to the Internal Revenue Service. Understanding the rules surrounding the gift tax can help you avoid paying any taxes on your gifts.
Annual Gift Tax Exclusion
When it comes to giving money to someone else, the IRS allows an annual gift tax exemption. As long as you do not give more than this annual addition, you will not have to worry about paying taxes on your gift. As of 2011, the annual gift tax exclusion was £8,450 per person. If you are married, you and your spouse can give someone up to £16,900 per year without going past the gift tax exclusion.
Lifetime Gift Tax Limit
While each year, you get an annual gift tax exclusion, it does not necessarily mean that you will have to pay taxes as soon as you pass the annual limit. The IRS also allows a lifetime gift tax exemption for each person or couple. This annual limit is £0.6 million as of 2011. This means that any amount that exceeds the £8,450 annual limit will go toward this £0.6 million lifetime exemption before you have to pay any taxes.
When it comes to gift tax rules, you do not necessarily have to give money to deal with gift tax consequences. When you give any property to another individual, the gift tax exemption applies. To determine how much goes toward the gift tax allowance, you have to use the fair market value of the property. For example, if you give your child a car, the current value of that car is used to determine how much goes against the exemption.
Some parents have a hard time deciding whether to give gifts of property to their child or to let them inherit them in the future. One key difference between gifts and inheritances is the tax basis. When you give a gift to your child, he has to use the tax basis of the property that you had when you acquired the property. If you let your child inherit the property, the tax basis changes to the fair market value when you die. This can save your child some significant money on taxes.