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Are there scenarios where parents would be taxed for giving gifts to their children, such as on birthdays, Christmas, etc.? Would gifts be subject to gift taxes if the amount exceeds $15,000/$30,000 (the current maximum that's subject to the annual exclusion for single parents and married parents, respectively)? Also, what about the kiddie tax? (I assume the kiddie tax applies just to monetary income, rather than physical gifts.)

For gift taxes, I've assumed that holiday-themed gifts to children wouldn't be the focus, but it appears children aren't exempt the way spouses are. Does this mean that to avoid gift taxes, parents must be careful not to exceed the amount covered by the annual exclusion for each child? And for the kiddie tax, would this mainly apply to things like an allowance, not one-time gifts?

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(This is not meant as personalized tax advice - consult a tax lawyer or accountant for advice on your own tax situation.)

As background, it's helpful to remember why the gift tax exists - it's to close a loophole in the estate tax. If a wealthy parent dies and leaves all their assets to their child, the government collects estate tax on the amount of the estate. So the parent might think to circumvent this by gifting most of their assets to the child before they die. That would deprive the government of a lot of revenue, so the gift tax ensures that such gifts are taxed in a roughly similar way to inheritances.

So yes, if a parent gives their children birthday presents whose value exceeds the annual exclusion, then the parent must report the gift to the IRS (Form 709), and pay gift tax if necessary. Note that they only have to actually pay tax once the total amount of the gifts over their lifetime exceeds a lifetime exclusion amount, currently about $12 million. This tax is really only meant to hit the "1%".

It doesn't matter whether the gifts are of money or other items of value. "The gift tax applies to the transfer by gift of any type of property." If it only applied to money, there'd be another loophole: the parent could dodge the tax by spending all their assets on a $20 million dollar gold bar (or painting, jewelry, rare postage stamp, etc) and give that to the child instead, which the child could then turn around and sell.

The "kiddie tax" is an income tax on children. Gifts are generally not taxable income to the recipient, so the child would not be liable for any income tax, no matter how large the gift or how it is given. (The gift tax is not an income tax and is imposed on the giver, not the recipient.)

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  • Thanks for the reply, which answers my question on the gift tax. According to one source, however, "The Kiddie Tax is designed to stop parents from giving large gifts to their children, only to have their children realize gains at a much lower tax rate." Therefore, could the kiddie tax apply to gifts after all, since that's what it was designed to stop abuse against? What are your thoughts? Source: thecollegeinvestor.com/35257/what-is-the-kiddie-tax/….
    – The Editor
    Commented Nov 20, 2021 at 14:14
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    @TheEditor: The kiddie tax closes a separate loophole whereby an income-producing investment (e.g. interest-paying bonds) could be given to a child, so that the interest income in following years would be taxed at the child's lower rate (because the child's total income is lower). Under the kiddie tax, some portion of that interest income becomes taxable at the parent's rate instead. But the kiddie tax does not tax the gift itself. If the gift was something that doesn't produce income, then the kiddie tax doesn't affect it.
    – Nate Eldredge
    Commented Nov 20, 2021 at 16:07

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