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
The post Gift Tax: The Tax Implications of Supporting Adult Children appeared first on TaxAct Blog.– Tax Tips and Tax Planning Resources | TaxAct Blog Read More