The Internal Revenue Service allows taxpayers to give cash, personal property or real estate gifts to their children without having to pay federal income taxes on their transfers if the monetary value of their gifts is within the annual federal tax limits. Donees or recipients of gifts are not responsible for paying federal income taxes on the fair market value of their gifts. Instead, the IRS imposes federal income tax responsibilities on donors.
1. Calculate how much money you are gifting to your children. For 2011, the IRS does not impose federal income taxes on taxpayers who transfer gifts of less than $13,000 annually. The $13,000 limit applies to each donee receiving the gift. Thus, a taxpayer with three children may give three separate gifts of up to $13,000 each without incurring federal income tax liabilities.
2. Give $13,000 or less to each of your children. By giving $13,000 or less to each of your children, you will avoid paying federal income taxes and reporting your gifts on your tax returns. The year in which you make your gift determines your tax liabilities. The gift exclusion typically increases every few years. For instance, taxpayers were subject to gift taxes on their cash gifts of more than $12,000 between 2006 and 2008. However, from 2002 to 2005, they were subject to gift taxes on gifts of more than $11,000.
3. File a gift tax return if your gift exceeds the $13,000 annual limit. You must use IRS Form 709, U.S. Gift and Generation-Skipping Transfer Tax Return. Generally, you must file your federal gift tax return by the normal April 15 filing deadline in the year after you made your gift.
4. Use the federal "gift splitting" rules. The IRS allows married taxpayers to combine or aggregate their gifts to increase their taxable exclusion limits. For 2011, you and your spouse can give each of your children up to $26,000 without incurring federal income tax liabilities.