September 27, 2023

Gift Tax: The Tax Implications of Supporting Adult Children

Updated for tax year 2023.

Do you currently have adult children who are not your dependents living under your roof?

If you are supporting adult children, or even giving them a helping hand now and then, you’re not alone. In today’s tough job market, getting a good career started can take a little longer than planned.

The last thing you need when you’re trying to be helpful, however, is to be worried about paying gift tax. Fortunately, your chances of actually owing gift tax are very low. To set your mind at ease, first, determine if you’ve given any one child more than the limit for a calendar year.

At a glance:

You can gift your adult child up to $17,000 in 2023 without filing a gift tax return. 
Filing a gift tax return doesn’t necessarily mean owing gift tax unless lifetime gifts exceed $12.92 million (in 2023).
Paying your adult child for services rendered is not a gift and can be deducted as a business expense.
Adult children over 24 can be claimed as dependents if they meet specific IRS criteria.

Is your adult child your dependent?

When your adult child qualifies as a dependent, you can spend money on them without it being considered a gift for tax purposes.

If your adult child aged 19-24 is a full-time student for at least 5 months of the year, they can qualify as your dependent. To claim them as a dependent, you must provide more than half of your child’s support during the year.

If you support your non-disabled adult child age 24 or older, you cannot claim him or her as a “qualifying child” to be a dependent by IRS definitions. However, you may be able to claim them as a qualifying relative.

You can claim your son, daughter, stepchild, eligible foster child, brother, sister, half-sibling, step-sibling, or descendant of any of these as a qualifying relative. Your adult children do not need to live with you to be considered a dependent.

To qualify as a dependent, your adult child must have less than $4,700 in gross income for 2023 ($4,400 for 2022), and you must provide over 50 percent of their total support.

What counts as a gift for tax purposes?

The IRS considers any transfer of substantial value (such as money or property) to someone where you don’t receive the full value in exchange to be a gift. This can include cash, real estate, vehicles, and even interest-free loans given to your adult children.

For more information about gift tax nuances, check out the IRS’s frequently asked questions on gift taxes.

How much can you give?

As of 2023, you can give an adult child up to $17,000 in a year before you must file a gift tax return.

If your adult child is married, you can also give up to $17,000 to their spouse. If you’re married, you and your spouse can both make gifts, meaning the maximum gift one married couple can gift their married child and spouse without filing a gift tax return is $68,000.

This amount is per calendar year and does not roll over from year to year. Try not to give all your assistance in one year if you want to avoid filing gift tax returns. This annual exclusion can change from year to year (it was $16,000 in 2022), so make sure you know what the exclusion amount is for a given tax year.

Not all money transfers are gifts

The IRS isn’t interested in the rental value of your adult child’s old bedroom, or the amount of food that disappears from your refrigerator. If you are ever audited, however, the IRS may notice large checks written to your adult child, or a transfer of a valuable asset, such as a car.

You can pay as much as you want for tuition, medical expenses, or health insurance premiums on behalf of your adult children without worrying about gift tax returns. Just make sure you pay the school, hospital, or other organization directly, rather than sending a check to your adult child.

Payment for services

Any amount you pay your adult child, either in your business or for personal services, is not a gift. However, the amount you pay must be reasonable, and the child must have actually done the work.

If you pay your adult child in your business, you can deduct the amount you pay them as a business expense. It’s a win-win situation — you avoid the possibility of gift tax and lower your tax bill, while your child feels useful and doesn’t need to feel guilty about accepting help.

Your adult child may even be able to contribute to a retirement plan, such as an IRA, if they earn income by working for you.

If your child is over age 21, you generally owe payroll taxes if you pay your child wages.

Filing a gift tax return doesn’t mean you owe gift tax

What happens if you give your adult child more than $17,000 in a year?

Not much. You must file Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. Until your total gifts reported on gift returns reach the $12.92 million lifetime exemption amount, you won’t owe any tax. That puts most of us in the clear.

This lifetime exclusion amount is accurate as of 2023 and may change in future years (for example, it was only $12.06 million in 2022).

But even if you do not owe gift tax, you must file Form 709 for each year in which you gift your adult child more than $17,000.

This article is for informational purposes only and not legal or financial advice.

More to explore:

3 Easy Ways to Avoid Paying A Gift Tax
How Tax Brackets Work
Taxable Income Calculator
What Does My Wedding Dress Have to do With My Taxes?
11 FAQs About Estate Taxes and Inheritance Planning

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Your Complete Guide to Employee Stock Options and Tax Reporting Forms

Updated for 2023.

Stock options and stock purchase plans are a popular way for employers to pad an employee’s compensation outside of a paycheck. However, the Internal Revenue Service (IRS) still requires you to report those benefits on your tax return.

To make tax time less stressful, here’s a quick breakdown of some popular employee stock options and plans. Plus, we’ll look at some of the specific tax forms needed for reporting purposes.

At a glance:

ESPPs allow you to buy company stock at a discount; they are considered ordinary income or capital gain income.
RSUs are awarded as compensation, taxed as income when they vest, and the value at vesting becomes the adjusted cost basis.
ISOs come with strict requirements, while NSOs are less restrictive.
Different tax forms are used to report various kinds of stock compensation.

Employee Stock Purchase Plans (ESPP)

This voluntary program, provided through your employer, allows you to make payroll contributions to purchase company stock at a discount. The discount can be up to 15% lower than the market price.

Generally, there is an offering period in which the employee can make contributions to this program. The stock’s market price for purchase is then determined on the purchase date. At that time, the employee’s contributions are used to purchase stock at a discount on the employee’s behalf.

Based on how long the employee holds the stock, the discount is considered ordinary income and included on Form W-2 by the employer (nonqualifying position). It is considered capital gain income and accounted for at the time of sale (qualifying position).

Your adjusted cost basis for non-qualifying positions is the compensation income reported on Form W-2 plus your acquisition cost.

For qualifying positions, your cost basis is simply the acquisition cost, allowing the discount received to be reported as a capital gain instead of ordinary income.

Restricted Stock Units (RSU)

These stock units are awarded to an employee as a form of compensation. The employee does not receive the stock at the time of the award but has a specific vesting plan outlining when the employee will receive the stock.

When the stock vests, the employee receives the units, and the fair market value (FMV) of the stock received on that date is considered income. Depending on the employer’s stock plan, you may elect to pay taxes on the income when the stock is awarded, at the time the stock vests, or the vesting date.

The amount your employer reported to you as income on Form W-2 at the time the stock vests will then be your adjusted cost basis in these stock units.

Incentive Stock Options (ISO)

The requirements for ISO units are stricter and, in turn, provide more favorable tax treatment.

ISO units must be held for at least one year after the options are exercised (bought). In addition, you cannot sell the shares until at least two years after the options are awarded to you. For these reasons, any discount you receive by purchasing these options is taxed as a long-term capital gain, which yields a lower tax rate than ordinary income.

Nonqualified Stock Options (NSO)

While ISO units are more restrictive, NSO units are more general. These stock options will generate ordinary income and a capital gain/loss.

When these options are granted, they are granted at a predetermined price. This allows the employee to exercise these stock options at that price regardless of the stock’s price on the date the option is exercised.

When the option is exercised, the employee has ordinary income for the difference between the price they pay (grant price) and the fair market value on the date they purchased the stock (exercise price).

Form W-2

Any compensation income received from your employer in the current year is included on Form W-2 in Box 1.

If you sold any stock units to cover taxes, this information is included on Form W-2 as well. Review Boxes 12 and 14 as they list any income on Form W-2 related to your employee stock options.

Form 1099-B

You will receive a Form 1099-B in the year you sell the stock units. The form reports any capital gain or loss resulting from the transaction on your tax return.

You should review your investment records to verify the cost basis amount on Form 1099-B. The cost basis on your Form 1099-B is based on information available to your brokerage. If the information available is incomplete, your cost basis amount may be incorrect.

If your cost basis amount on Form 1099-B doesn’t match your adjusted cost basis based on your records, you can enter an adjustment code B in TaxAct®. Similarly, your Form W-2 likely won’t include your cost basis on Form 1099-B. You’ll want to enter an adjustment amount with code B.

If your Form 1099-B is missing a cost basis amount, you must still calculate and report your cost basis on your tax return.

Form 3921

Form 3921 is issued for incentive stock options in the year they are transferred to the employee. It includes the necessary information to properly report the sale of these units when you decide to sell.

Save this form with your investment records. Until you sell the units, you don’t have to enter information from Form 3921 into your tax return.

Form 3922

Form 3922 is issued for employee stock options you purchased but do not sell.

Since you have not sold the stock, the holding period requirements have not been determined. Therefore, the employer does not include compensation income on your Form W-2 as ordinary income.

Form 3922 is issued to report the income on your tax return when you sell the units. Like Form 3921, save Form 3922 with your investment records.

This article is for informational purposes only and not legal or financial advice.

All TaxAct offers, products and services are subject to applicable terms and conditions.

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