Tax considerations for gifts to children

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If you make significant gifts to your children, there are a number of factors to consider.

Transfers that are not taxable gifts
There are a variety of ways for you to make transfers to children that are not treated as taxable gifts for gift tax purposes. Filing a gift tax return is generally required if you make gifts totaling more than $14,000 to an individual during the year.

  • Providing support — This should not be treated as a taxable gift if you have an obligation to provide support under state law.
  • Annual exclusion gifts — You may generally make gifts of up to $14,000 per child gift-tax free each year. If you split gifts with your spouse, the amount is effectively increased to $28,000. If the gift is to a qualified tuition program (529 plan), the annual exclusion can be effectively increased to five times the above amounts.
  • Qualified transfers for medical expenses — Unlimited gifts can be given for medical care gift-tax free if made directly to the medical care provider.
  • Qualified transfers for educational expenses — Unlimited gifts for tuition can be given gift-tax free, if made directly to the educational provider.

The same exceptions for transfers that are non-taxable gifts generally apply for purposes of the generation-skipping transfer (GST) tax. This is a separate tax that generally applies when you transfer property to someone who is two or more generations younger than you.

Income tax issues
A gift is not taxable income to the person receiving the gift. However, when you make a gift to a child, there may be several income tax issues regarding income produced by the property or from sale of the property.

  • Income for support — Income from property owned by your children will be taxed to you if used to fulfill your obligation to provide support.
  • Kiddie tax — Children subject to the kiddie tax are generally taxed at their parents’ tax rate on any unearned income over a certain amount.
  • Basis — The person receiving the gift generally takes an income tax basis (or “carry-over basis”) equal to your basis in the gift. The carried-over basis is increased — but not above fair market value (FMV) — by any gift tax paid that is attributable to appreciation in value of the gift. The income tax basis is generally used to determine the amount of taxable gain if the child sells the property.

Gifts to minors
Outright gifts should be avoided for any significant gifts to minors. Instead, consider a custodial gift or a trust for a minor.

  • Custodial gifts — Gifts can be made to a custodial account for the minor under the Uniform Gifts/Transfers to Minors Act. For Iowa residents, the custodian holds the property for the benefit of the minor until age 21.
  • Trust for minor — A Section 2503(c) Trust is designed to obtain the gift tax annual exclusion for gifts to a minor. Principal and income can be distributed to the minor before age 21, but there is no requirement of any distribution to the minor before age 21.
 Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016.

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