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With the student debt crisis and the slow growth of the economy, many young adults are relying on their parents for financial support. Any assistance given from parents to adult children will technically be considered a “gift” for tax purposes. When the US Congress increased the Estate Tax exclusion, they also unified the Estate and Gift tax exclusions into one lifetime exclusion, meaning any gift made during your lifetime that is in excess of the yearly gift exclusion is subtracted from your total Estate Tax exclusion. So, how much can you give?
The current gift tax exclusion amount is $14,000 per year for each beneficiary. For married couples, that amount is doubled. Parents can give each of their children up to $28,000 per year without having to worry about gift taxes. However, if you gift any amount over that, it will be subtracted from your lifetime exclusion amount ($5.43 million or $10.86 million for couples).
Any gift, not just cash, can count towards the yearly exclusion amount. However, the IRS allows parents to pay for their children’s college tuition directly without it being considered a gift.
As an alternative, parents can also lend their children money, but it must be carefully documented. You must also charge interest of at least the Applicable Federal Rate published by the IRS each month. If things change and your children can no longer afford to pay the note associated with the loan, you can forgive the debt and the debt forgiveness will be considered a gift. No harm, no foul.