The thread on the 14,000 per year tax exclusion for gifts got me wondering about adults fully supported by their parents, basement dwellers etc.
Does the gift exclusion also apply to stuff like housing or food and other expenses provided? I know someone who gives their 20 year old $400 USD a WEEK for food alone!
I realize this is totally academic since it would never be enforced or caught in the real world, I’m just curious.
I always thought the gift tax had to do with cash gifts and not free rent etc., but I may have that wrong.
Wouldn’t our basement-dwelling 20-something be expected to report as “income” the fair market value of a similar rental basement, all the food he gets, etc., for income tax purposes?
Gifts (including free rent) do not need to be reported as income, but they do fall under the gift tax provisions.
The exemption is $14,000 per year, plus a lifetime exemption of $5.34 million. So if you’re not going to have an estate of that size, you don’t really need to worry about the implications of supporting an adult child.
Per this U.S. News article, the IRS isn’t really worried about the free rent/food type of support. The main concern is giving your children large checks.
No. And the parents might be able to claim their kid, depending on age and certain other qualifying factors (not a current link, so check the requirements for the year you’re filing).
The basic issue can be summed up by the IRS web page here: “The gift tax is a tax on the transfer of property.”
While rent, groceries, etc. (as part of the parent’s household) have value, they are not a transfer of property. This is why it actually can make a difference whether a parent provides rent worth $15,000 in their house vs writing the kid a check for $15,000 in a separate apartment, and why letting the kid use the parent’s house or car is different from giving the kid their own house or car. The check, house and care are all a transfer of property; benefit from household expenses is not a transfer.
There are also some exceptions for certain types of expenses, such as medical and education expenses. When parents are supporting kids, this can cover a lot of the expenses they pay.
Of course, it’s also relevant that the IRS is not on the prowl for gifts of $20,000 in a year. Even if this should be reportable, the lifetime exclusion means most people will never pay tax on gifts. The IRS is much more interested in tracking down $20,000,000 in gifts.
Far more important is that if this adult is truly fully supported by his parents, he probably qualifies as a dependent on his parents tax return. In a vaguely similar situation, my grandmother lived with us for quite a few years when she was elderly. We provided most of her support and I know she was listed as a dependent on my parents return.
Sorry, but what does that mean? Taxes due on gifts over $14,000 a year? Or only due when the total given exceeds the $5M lifetime number? Or once you ht the magic $5M you pay taxes on all gifts, no $14,000 exempt.
If your gift to a person exceeds $14,000 in a year, the amount over $14,000 is deducted from your lifetime gift tax exemption (which is around $5 million.) Once you use up that $5 million lifetime exemption you have to start paying gift taxes.
In particular, once your gift exceeds $14,000 in a year, you have to fill out a gift tax return. However, you don’t actually pay any tax until you exceed the lifetime exemption.
Also, the gift is for each person. Both the mother and the father can each give the child $14,000.
Also the recipient doesn’t pay the tax, the giver does.