Yes, in most cases parents can give $100,000 to a child tax-free, either as a lump sum gift or spread out over multiple years. The IRS allows each person to gift up to the annual exclusion amount ($16,000 in 2023) to as many people as they want each year without filing a gift tax return. Amounts over that are subject to the lifetime gift exemption amount ($12.92 million in 2023), above which gift tax would be owed. As long as the parents have not already used up their full lifetime exemption, they can gift $100,000 tax-free.
Gifting Rules and Limits
The IRS allows individuals quite a bit of leeway to gift money and assets tax-free. Here are the key rules and limits to be aware of:
- Annual exclusion: Each individual can gift up to the annual exclusion amount ($16,000 in 2023) to an unlimited number of recipients each year without eating into their lifetime exemption or triggering gift taxes. A married couple can jointly gift up to $32,000 using both of their annual exclusions.
- Lifetime exemption: Each individual has a lifetime gift and estate tax exemption ($12.92 million in 2023). You can gift any amount up to that total over your lifetime without owing gift taxes. Any amounts reported over the annual exclusion will reduce your available lifetime exemption.
- Unlimited spousal gifts: There is no limit on tax-free gifts between spouses who are U.S. citizens.
- Medical and education gifts: You can pay unlimited amounts of someone’s medical bills or tuition without it counting against annual or lifetime gift limits.
So in most cases, a gift of $100,000 from parents to a child can be made completely tax-free. If the parents are married, they could gift the full $100,000 amount immediately using their combined $32,000 annual exclusion and the remaining $68,000 from their lifetime exemption. Or the gift could be spread out over multiple years.
Requirements for Tax-Free Gifting
While the tax rules accommodate large tax-free gifts, there are some requirements that must be met:
- The gift must be of a “present interest” to qualify for the annual exclusion. Gifts to trusts or gifts with strings attached generally don’t qualify.
- To apply the lifetime exemption, the gift must be reported on IRS Form 709 when your total gifts for the year exceed the annual exclusion amount.
- Larger gifts should be disclosed to the IRS to avoid potential gift tax audits or penalties down the road.
- The gift must be properly structured with no retained benefit or control by the gift giver. The recipient must have sole ownership and benefit of the gift.
As long as you meet these rules, report gifts properly, and have sufficient lifetime exemption available, you can give $100,000 or even more to a child completely free of federal gift tax.
State Gift Tax Rules
While federal law accommodates large tax-free gifts, a few states have their own state-level gift tax that should be considered:
- Connecticut – Gift tax kicks in once gifts exceed $5.1 million over a lifetime.
- Hawaii – Has an exemption of $5.49 million before a 20% gift tax applies.
- Minnesota – Has a $1 million exemption before a 10% gift tax applies.
- New York – Exemption is $5.85 million before graduated gift tax rates apply up to 16%.
So in these states, there may be some state gift tax owed if total lifetime gifts exceed those exemption amounts. For example, a $100,000 gift could trigger gift tax in Minnesota because it exceeds the $1 million state exemption.
Gift Tax Returns
If you give monetary gifts that exceed the $16,000 annual exclusion amount, you are required to file a gift tax return (IRS Form 709). The return is due by April 15th of the following year.
The purpose of filing the gift tax return is:
- To disclose gifts over the annual exclusion to the IRS for their records
- To apply your available lifetime exemption amount toward the gift
- To split gifts with your spouse if you are married
- To calculate any gift tax that may be due
You are not required to file a gift tax return for gifts under the annual exclusion amount. But for gifts over $100,000, it is advisable to file the return even when no tax is due, both to disclose the gift to the IRS and to lock in your lifetime exemption usage.
Information Reported on Form 709
Key details that must be reported on IRS Form 709 include:
- Your name, address, and taxpayer ID
- Information about each gift, the recipient, the type of asset gifted, and the value
- Any eligible annual exclusion claimed toward the gifts
- Any lifetime exemption amount applied
- Split gift details if you are married
- Calculation of any gift tax owed
Form 709 can be complex, so working with a tax professional is advisable when dealing with large gifts. Proper reporting of gifts over the annual exclusion is key to avoiding trouble down the road.
Strategies for $100,000 Tax-Free Gift
If you want to gift $100,000 tax-free, here are some strategies that could apply:
Lump Sum Gift
As mentioned, a married couple could gift the full $100,000 in one year by:
- Applying $32,000 total under the annual exclusions ($16,000 each)
- Applying the remaining $68,000 under the lifetime exemptions
No gift tax return would be required for the portion under the annual exclusions. But a Form 709 should be filed to report the lifetime exemption usage.
Spreading Over Multiple Years
Another approach is spreading the $100,000 gift over 6 years by gifting $16,000 per year (the annual exclusion amount for a single person, or $32,000 for a married couple). This avoids tapping into the lifetime exemption or filing gift tax returns.
Paying someone’s medical bills or tuition directly does not count toward gift limits. So parents could pay $100,000+ toward a child’s medical costs or college education completely tax-free in one year.
More advanced strategies like gifting to trusts or entities can also work to leverage annual exclusions and lifetime exemptions. An experienced estate planning attorney can provide guidance on trusts.
While the idea of gifting $100,000 may seem too good to be true, the tax rules actually make it straightforward in most cases. The key is staying under the annual exclusion each year or having sufficient lifetime exemption available. Proper reporting and structuring also ensures the gifts are truly tax-free. With some planning and advice from a tax pro, $100,000 gifts from parents to children can generally happen without incurring any gift tax liability.