Is a cash gift to my adult children tax deductible for me?

For 2009 you are allowed to gift $13,000 to as many individuals as you want, including your children. Your wife can also do the same thing for a total of $26,000 per individual with out incurring any gift tax or generations skipping transfer tax. These gifts are not income tax deductible, but if you have a large estate, proper gifting can lower your estate tax bracket.

These gifts are also not considered income, so your children or others do not have to report it on their income tax. But, you do have to watch the size of the gift. For most people, this is not a problem, but you just need to be aware in case it applies to you.

There is a lifetime gift tax exclusion of $1,000,000 per person. For example, let's say you gave a cash gift to your adult children of $15,000 each. And, in this example you have two children.

You have exceeded the allowable amount ($13,000 x 2 =$26,000) by $4,000. So, it this case you have used $4,000 of the $1,000,000. You now have lifetime gift exclusion remaining of $996,000.

This $1,000,000 does not apply to your spouse. Gifts to spouses are unlimited. Because you exceeded the annual gifting amount by $4,000 you have to file a gift tax return.

This is required by law. But filing the gift tax return does not mean you have to pay gift tax unless the amount is very large. Another thing to watch is how much of the lifetime gift exclusion you use, because it also impacts the lifetime estate tax exclusion of $3,500,000.

This $3,500,000 is the amount you can pass at death without triggering estate tax. The amount you can pass to your spouse is unlimited, but there is a cap on what you can pass at death to others. You should also be careful on what you gift, because you an create an unwanted tax problem for the recipient.

For example, if you give a gift of stock, the stock is valued at what you paid for it. So let's say you give a gift of stock worth $13,000. But, you bought the stock for $5,000.

If the recipient sells the stock, he or she will have to pay capital gains tax on the $8,000 difference. This amount can be even higher if they hold on to the stock for a while before they sell it. It could also be less if the value of the stock drops during the time they own it.

It is important to make sure that gifts of property of this type have paperwork to show the purchase price so the beneficiary can make the proper tax calculations. But, it you passed the stock at death, the stock will have what is called a stepped up in basis. This means the stock passes to the beneficiary at the $13,000 value.

If he or she sells the stock, there is no capital gain tax to pay, unless the value of the stock was worth more than $13,000 This also applies to homes and other property that has a basis. Gifting can be an excellent way to reduce the size of your estate, and lower your estate tax exposure if you have any. The best way to make sure you are gifting correctly and taking maximum advantage of the estate tax laws is to use the services of an estate planning attorney.

If you only plan to make small cash gifts to your children, you don't need to do anything other than keep track of the value of the gifts is case over time the total amount has an effect on lowering the value of your estate.