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How does a parent know whether to pay a gift tax this year?

How does a parent know whether to pay a gift tax this year?

For most parents, gift taxes are not even on the radar screen while their child is enrolled in high school. But college can change everything. Suddenly, you are paying costs of living, which can add up quickly. In order to remain compliant with taxes, you might be required to fill out Form 709.

Here is what you need to know.

The Gift Tax Basics

As a general rule, any property you transfer to another person is considered a gift – a car, a condominium, or a piece of furniture. This does not keep you from allowing your friends or relatives from freely using your property as if it were theirs, but it does mean that you retain ownership, or the item must be counted as a gift. Large sums of cash and any other real property – if gifted – will count toward your annual gift tax exclusion.

In 2013, the exclusion rose to $14,000. This means that the first $14,000 of purchases you make for another individual are tax free, and as long as you do not cross the minimum limit, you do not need to fill out a Form 709. The $14,000 can be applied to every family member. So if you want to give a bunch of cash to your daughter’s family of 4, you would be able to give $56k before reaching the annual limit.

There are also a number of exceptions in the case of certain types of costs that are not counted toward the annual limit. The two major exceptions are payments made for qualified educational and medical expenses. Only tuition counts as a qualified educational expense – not school supplies, room & board, or any other miscellaneous fees associated with college.

Medical expenses you pay on behalf of another individual do not count toward your annual gift exclusion. But make sure that all reimbursement from health insurance is directed toward you.

READ: How to save on taxes when your college grad moves back home

If you exceed the $14,000 limit in any given year, then you are required to fill out Form 709 with the amount in excess. You will probably not need to pay taxes on your gift, however. The lifetime exception for gift and generation-skipping taxes is currently $5,250,000, meaning that until you give over $5 million, your gifts will not be taxed.

 


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