Reduce Taxes with Smart Gifting Strategies for Adult Children

As adult children become financially independent, parents may consider gifting strategies to help them reduce their taxes. With proper planning, gifting can be an effective way to transfer wealth to adult children while minimizing tax liability for both parties.

One tax-efficient gifting strategy is to take advantage of the annual gift tax exclusion. As of 2023, individuals can give up to $17,000 per year to each recipient without triggering gift tax. Married couples can give up to $34,000 per year per recipient. By gifting within these limits, parents can transfer wealth to their adult children without incurring gift tax or reducing their lifetime gift and estate tax exemption.

Another gifting strategy is to make use of the lifetime gift and federal estate tax exclusion. In 2023, the lifetime exclusion is $12.92 million, or $25.84 million for married couples. This means individuals can give even more than the annual exclusion to any or all heirs and still not trigger a tax bill. By choosing to have the excess amount reduce the lifetime exclusion, parents can transfer wealth to their adult children while minimizing their own tax liability.

Understanding Tax Reduction

When gifting assets to their adult children, many parents are interested in reducing their tax liability. There are several strategies that can be employed to achieve this goal. This section will explore the benefits of tax reduction and the gifting limits that apply.

Tax Reduction Benefits

One of the primary benefits of gifting assets to adult children is that it can reduce the donor’s tax liability. By transferring assets to their children, parents can remove those assets from their taxable estate. This can be particularly beneficial for parents who have a large estate and are concerned about estate taxes.

Additionally, gifts to adult children can be structured in a way that minimizes the donor’s gift tax liability. For example, gifts can be made in amounts that are below the annual exclusion limit, which is currently $17,000 per year for 2023. Gifts that fall below this limit are not subject to gift tax.

Another strategy for reducing tax liability is to gift appreciated assets. When appreciated assets are gifted, the donor avoids paying capital gains tax on the appreciation. This can be a particularly effective strategy for parents who hold assets that have appreciated significantly since they were acquired.

Gifting Limits

While gifting assets to adult children can be an effective strategy for reducing tax liability, there are limits to how much can be gifted without incurring tax consequences. As mentioned earlier, the annual exclusion limit for 2023 is $17,000 per year. This means that parents can gift up to $17,000 per year to each of their adult children without incurring gift tax.

It’s important to note that there is also a lifetime gift tax exemption, which is currently $12.06 million for 2023. This means that parents can gift up to $12.06 million over their lifetime without incurring gift tax. However, it’s important to work with a financial advisor or tax professional to ensure that gifting strategies are structured in a way that maximizes tax benefits and minimizes tax liability.

Gifting Strategies for Adult Children

When it comes to gifting strategies for adult children, there are a variety of options available that can help reduce tax liability. Here are some popular strategies:

Cash Gifts

One of the simplest gifting strategies is to give cash to adult children. For 2023, the IRS allows individuals to make gifts of up to $17,000 per year to an unlimited number of individuals, with no federal gift or estate tax consequences. A spouse can give the same amount, effectively doubling the amount a couple can gift. Parents can also pay for their adult children’s medical expenses and tuition, which are exempt from gift tax.

Gifts of Property

Another gifting strategy is to give property to adult children. This can include real estate, vehicles, and other valuable assets. However, it’s important to keep in mind that the fair market value of the property will be subject to gift tax. Parents may want to consider gifting property that has appreciated in value, as this can help reduce capital gains tax liability for both the parents and the children.

Gifts of Stocks and Bonds

Gifting stocks and bonds to adult children can be a powerful way to transfer assets out of your own estate even during a down market. Gifting lower valued securities today means less gift tax liability for the donor and greater upside potential for the recipient if the securities are expected to appreciate over time. Parents can also consider gifting appreciated securities to their adult children, which can help reduce capital gains tax liability.

529 College Savings Plans

Parents can also contribute to 529 college savings plans for their adult children, which can help reduce tax liability while also helping to fund their children’s education. Contributions to 529 plans are considered gifts for tax purposes, but they are exempt from gift tax up to a certain amount. Additionally, earnings in a 529 plan grow tax-free as long as they are used for qualified education expenses.

Overall, gifting strategies for adult children can be a powerful tool for reducing tax liability while also helping to transfer assets out of your own estate. Parents should consider working with a financial advisor or tax professional to determine the best gifting strategies for their individual situation.

Conclusion

When it comes to gifting strategies for adult children, there are many options available that can help reduce taxes. By taking advantage of the annual gift exclusion, parents can give up to a certain amount each year without incurring any gift tax or using any of their federal tax exemption. This can be a great option for parents who want to provide financial support to their children without reducing their lifetime giving credit.

Another option is to consider lifetime gifting strategies, especially for clients who are projected to have a federally taxable estate. By gifting assets now, clients can take advantage of the current higher lifetime gift tax exemption before it reverts back to the lower amount in 2026. Married clients with more than $23 million of combined wealth should be considering lifetime gifting strategies now.

For parents who want to reduce their estate tax burden, gifting cash or assets to their children can be a great option. However, it is important to consider the potential tax implications and to work with a financial advisor or tax professional to determine the best gifting strategy for their specific situation.

Ultimately, gifting strategies should be tailored to each family’s unique financial situation and goals. By understanding the options available and working with a professional, parents can provide financial support to their adult children while also reducing their tax burden.