According to a survey from Ameriprise Financial, 93% of all Baby Boomers (those from age 47 to 65) help to support their adult children. These middle-aged parents not only pay for college, they often allow their grown children to live at home rent-free (55%) and may help them to buy a car (53%). Then the parents frequently help their kids pay for auto insurance and car payments.
If you are in that situation, you might be able to help your kids in a tax-efficient way. Instead of giving them cash, give them appreciated securities to sell. They may owe less tax than you would owe on a sale.
The catch is the so-called kiddie tax. In 2012, youngsters can have no more than $1,900 of low-taxed investment income. Excess investment income is taxed at the parents’ rate, so tax saving is limited.
However, the kiddie tax usually expires when the youngsters leave school or reach age 24. At that point, you can give your youngsters any amount of appreciated assets to sell, at their low tax rate. In 2012, single taxpayers with taxable income up to $35,350 owe no tax on long-term capital gains while married couples filing joint returns owe 0% tax on long-term gains with taxable income up to $70,700.
To avoid gift tax problems, keep gifts to $13,000 or less per recipient this year. If you’re married, your spouse also can give up to $13,000 per recipient, tax-free.