Parents who want their kids to learn proper money management skills must have access to some money. Most gifts are limited in terms of their usefulness because toys will break, or they might lose them while getting tired of gadgets and other video games. With money, however, your kid gets the freedom of making choices.
However, gifting money should be thoughtful as their handling of such funds alongside tax purposes matters. No matter your purpose of giving such gifts – holidays, graduations or birthdays, one needs to take some steps so that the kids will understand your intention and value such gifts.
What Is your aim?
It is essential to have a motive behind every monetary gift you give your kids. It might be to power a future goal such as retirement or college or make the kid understand what it means to invest in stocks and mutual funds. Someone else might be interested in how their kid will feel, knowing they have money of their own.
Whatever reason one has, it needs to be handled in different ways. The recipient of such gifts needs to understand your intention alongside any other thing expected of them.
How Kids Interpret Gifts of Money
A six-year-old will be disappointed to have a check as a Christmas gift. It is not surprising as little kids are not developed enough to understand what a check means and might not be so elated to receive it.
On the other hand, cash is better even though gifting of cash should be done such that the kid understands. A young kid will assume that all the dollar bills are the same, and it is your responsibility to let them know that they cannot have it yet.
People who want to give cash need to give it in a way the child understands, which will help their money handling skills in the future. Try and explain your gift and give suggestions on how best they can use it for you to engage their thinking faculties. By doing this, you have offered tips and guidance without attaching many strings to the money.
Tax Implications of Bigger Gifts
Uncle Sam has clear rules on gifting money. For the 2021 tax year, one can give up to $15,000 to another person every year; your wife can also do the same, which puts a cap on the gift at $30,000. There is a provision to give up to $11.7 million in one's lifetime or death for people that want to give more than that.
This limit was increased through 2025 based on the actions of the TCJA. As a result, married couples can be exempt up to $23.4 million in gifts even though one will have to file a gift tax return. Such tax was set up as many rich people used gifting to transfer funds from their estate before death to escape estate tax.
As a result, there might be more tax implications if you donate a considerable amount to your kids. Uncle Sam places the limit on a kid's unearned income at $2200 before taxes apply.
One also needs to put the kiddie tax in mind, especially if the purpose of the gift is to teach the kid investment. Uncle Sam set up this provision to prevent wealthy and affluent citizens from keeping money using a custodial account and their kid's name, who are in a lower tax bracket.
As a result, a kid with their unearned income above $2,200 will have part of it subjected to tax using the parent's rate and not the kid's rate.
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Tiffany Gaskin