How gifts from parents to children are taxed
Q: I am about to receive some money from my parents (about $12,000-15,000) to put towards my student loan. What will this do to my tax bracket and theirs?
A: The simple answer is that simple cash gifts are non-taxable. Period.
Your parents can give you any lump sum at all, and you don’t have to pay any tax on it. It doesn’t get reported on your return, so it can’t affect your tax bracket.
Now for every upside there’s a downside. In this case, it’s that if your parents give you the money as a gift, they can’t get a tax *break* for it either. No tax in, no tax out.
If you want to get fancy, and if one of your parents is in a high tax bracket AND has a business in which you sometimes help out, they could call the money payment for your help. The catch is, the money they’re paying you must be no more than what they would pay a non-related person to do the same work.
Within that limitation, you could try to calculate the payment to achieve a split of some sort (taxable pay + non-taxable gift = $15,000) in such a way that it provides a tax benefit overall. Because it’s pay rather than a gift, the money would increase your taxes, but it might reduce your parents’ taxes by a larger amount, so overall it would be a win for the family.
If you want to do that you’d best sit down with your accountant and everyone’s numbers to determine the optimal split.
The rules get more complicated if the gift is not cash, i.e., if it is in the form of stocks, property, or other things that can increase in value while in your possession…but that’s a topic for another Tip.