How can you gift money to your children or grandchildren without paying taxes? You’ve helped your children all your life. You’ve raised them, taught them right from wrong, and put them on the path to being good, responsible people. You’ve encouraged them to make their way in the world and helped them find their wings. But you’re still a parent. You’ve done well financially and you want to share your bounty with your loved ones, but you don’t want Uncle Sam to take his cut. How do you do that?
There are several ways to gift your children without paying gift tax. These can include direct cash gifts, payments directly to schools or medical providers, and contributions to 529 accounts.
The answer to this question may seem obvious – you love your kids. But there’s another reason: to avoid the whopping 40% estate tax if you leave an estate over the allowed limit. As of 2018, that threshold is a generous $10 million, but some people may still be close to that limit. If you are one of them, you may wish to reduce your estate to prevent the federal government from taking its piece of the pie.
As of 2018, you can give $15,000 per person without triggering gift tax. This is called the gift tax exclusion. If you’re married, your spouse can also give $15,000. You could even give to your child’s spouse, for a total of $60,000 to the couple, without triggering gift tax.
Paying for College or Medical Bills
Paying directly to a qualified educational institution or medical care provider on behalf of your loved one is a great way to give without triggering gift tax. Keep in mind that the gift being paid to the institution must be for tuition only. However, if you wish, you can still give your favorite college student up to $15,000 in cash toward books, room, and board without incurring gift tax.
529 Savings Plans
529 Savings Plans are a great choice if you only want the money to go to college education. Money accumulates tax free and earnings on the plan are not taxed.
Although generosity is a virtue, so is wisdom. Keep in mind Medicaid’s 5-year “look back” rule before you divest yourself too much. None of us ever expects to go on Medicaid, but a major illness can eat up savings very quickly. If you need nursing home care, Medicaid will look back at the gifts you’ve given over the past 5 years and assess a penalty in the form of a waiting period to receive your much-needed care. It’s something to consider when making your gifting decisions.