You would like to give your grandchild a large amount of money to be invested and one day used to fund his college education, but would your grandchild have to pay taxes on this gift? Would you have to pay taxes on making this gift? This scenario brings forth just one facet of a number of situations in which one may be required to pay a gift tax.
Let’s start with the positive, your grandchild is not required to pay a tax on the gift or report it as taxable income, but the government has limited self control in keeping its hand out of the cookie jar, so you may be required to pay a gift tax.
A transfer of property from one person to another is considered a gift if the person transferring the property either receives nothing in exchange for it or receives something in return which is not worth as much as the property given. You are considered to have made a gift to your grandchild because you received nothing in return for the money except your grandchild’s love and affection.
You must pay a gift tax if you give more than $11,000 worth of gifts annually or $22,000 annually if you are married and file joint tax returns. If you desire to give your grandchild an amount that exceeds your annual exclusion then you may either spread the gift over a period of years or wait until they are in college. Once they are in college you may directly pay their college expenses without having to pay a gift tax. Generally five types of gifts are not taxable. These exempt gifts are:
- Gifts below your annual $11,000 exclusion
- The payment of medical or educational expenses on another’s behalf
- Gifts to your spouse
- Gifts to a political organization
- Gifts to charities
By: Brett A. Kaufman, Esquire
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