If parents give cash to an adult child, when is there actually a gift tax problem?

Question

AcadiFi · Accepted Answer

For federal gift tax, the key questions are who made the gift, how much each donor gave to each donee, and whether the annual exclusion was exceeded. The recipient generally does not pay income tax on the gift. If a donor gives more than the annual exclusion amount to one donee in a year, that does not automatically mean tax is due right away, but it may trigger a gift tax return and use part of the donor's lifetime exemption.

Example: Redwood Family Holdings has two parents who want to help their married daughter. In one year, Parent A gives her $20,000 and Parent B gives her $20,000. If the annual exclusion is $19,000 per donor per donee, each parent exceeded the exclusion by $1,000. Each parent may need to consider Form 709 reporting for the excess, but the daughter still does not report the cash as taxable income. If instead each parent gave $19,000 to the daughter and $19,000 to the son-in-law, much more value could move without any taxable gift reporting.

The EA rule to remember is that gift tax is analyzed donor by donor, donee by donee. Do not confuse gift tax with income tax, and do not assume exceeding the annual exclusion means immediate out-of-pocket gift tax. Practice more in our EA question bank.

If parents give cash to an adult child, when is there actually a gift tax problem?

Master Part 1 with our EA Course

Related Questions

Practice Questions