Transferring money to a child can have tax consequences.
Transferring money to others can have tax consequences. Internal Revenue Service (IRS) rules define how much you can transfer without tax when you are alive (gift taxes) and how much when you die (estate taxes). When you transfer money to a child before going into a nursing home, the purpose of the funds determines whether you will have to pay tax.
Gift Tax Rules
If you give an individual money or an item of value with no expectation of receiving equivalent value, the IRS considers that you have given that person a gift. Subject to certain exceptions, the donor is subject to tax. There are no tax implications for the person receiving the gift. This rule also applies if you give a gift and only receive partial value for it. The unreimbursed value is considered a gift. If you give someone money to pay for your own expenses on your behalf, it is not a gift. For example, if you give your daughter $25,000 to pay for your nursing home expenses, she is not receiving value, as the money must be spent on your needs.
Annual Exclusion
The IRS provides relief for small gifts. You can gift $13,000 per year to any number of individuals without having to file a gift tax return. If you have a small estate and want to transfer it to a child with the least amount of tax, start by gifting up to this annual limit. If your child is a minor, you may have to pay the so-called kiddie tax on income earned on the gifted money. This law ensures that you can't transfer income-producing assets to your kids to be taxed at their lower rate. The kiddie tax kicks in at the highest tax rate. If your child is a minor, consult with an experienced CPA before planning to gift.
Medical Exclusion
If your child pays for some of your medical expenses from her own funds, she is exempt from the gift tax even if the amount is over the annual exclusion limit. Gifts made to pay for medical or educational expenses are not taxed under this law. The payments have to go directly to the medical facility or educational institution to qualify for this exclusion.
Spousal Limits
The annual exclusion limit of $13,000 is an individual limit. The IRS allows you to combine this with your spouse's limit for a total of $26,000 per year. However, if the total gift is over $13,000, you will have to file a gift tax return and claim the gift splitting exemption. For example, if you give your son $17,000 to purchase a car, you can divide the gift with your spouse and each claims a gift of $8,500. Because the total gift is over the individual exemption, you will file Form 709, Gift Tax Return.
Lifetime Exemption
Even if you are required to file a Gift Tax Return, chances are that you won't have to pay tax on the gift. You have a lifetime exemption of $5 million that you can gift without paying taxes. To claim against the lifetime exemption, file the Gift Tax Return for gifts over the annual limit.
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