There is a Federal Gift Tax but it is not clearly understood by most Americans. Some folks even think they can get a deduction for a gift to a friend or relative. So you want to give money to your kids or grandkids but wonder about the tax implications; how much is tax free? Or, if the kids are in bad financial shape and given money, is it a deduction? Hopefully, this article will answer your questions.

The Gift Tax is paid by the person giving the gift, not the one getting the gift. Even if your child or grandchild is destitute, there is no tax deduction for a gift to them. However, under current tax law, there is a $1 Million Lifetime Exemption to the Gift Tax. In addition to the Lifetime Exemption, you can give $13,000 each year to as many people as you want without incurring any Gift Tax. This figure is indexed for inflation and goes up every year. A husband and wife may each give gifts so in that event, $26,000 may be given by a married couple.  Cash gifts are not the only kind that are subject to the Gift Tax.  If real estate, fine art or precious jewelry is given, they also fall under the same dollar limits as cash gifts.

One may pay the medical bills or educational costs of another person and those payments are not treated as being part of the Annual Exclusion or Lifetime Exemption. If you reimbursed someone for the tuition they paid or that was paid with a student loan, that amount will be subject to the $13,000 limitation. If you reimburse someone for medical bills they paid, it also will be subject to the limit. It is very important that the giver pay the bills directly to the doctor, hospital or school and not to the individual who owes the bill. In this scenario a person could give their grandchild $13,000 directly tax free and pay the school tuition directly with no Gift Tax implications on either amount.

If gifts to any one person exceed the Annual Exclusion amount, then one must file a U.S. Gift Tax return, Form 709.  As gifts are made each year above the exclusion, the totals would count against the $1 Million Lifetime Exemption.  As long as the gifts don't exceed $1 Million total, no tax is due.  Once gifts made above the exclusion each year total over the exemption, the Gift Tax must be paid at very steep rates of between 37%-45%.  Please see a CPA, EA, or Accredited Tax Advisor for help in the tax planning of gifts. 

IRS Circular 230 Disclosure: The discussion of U.S. federal tax matters contained in this article is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding valid penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or tax-related matter[s] designed to avoid payment of taxes due the United States. No "covered opinion" under IRS Circular 230 is provided by virtue of this article.