It’s natural for families to help each other out, sharing their good fortune with those they love. So, what if a child or grandchild wants to purchase a home or car and needs some help? Should you gift them the money, or is a loan the better option? There may be business, personal or financial reasons to choose either of these methods. However, below we look at the question from a tax perspective, exploring these two common ways to financially lend a hand to members of your own family.
Why Is Gifting Money to Family Members an Attractive Option Right Now?
The answer to this question has to do with the passing of the Tax Cuts and Jobs Act of 2017. The Act raised the federal estate tax exemption/lifetime gift tax exemption to new heights and is adjusted for inflation each year through 2026. As of 2022, an individual can gift $12.06 million throughout their lifetime tax free. Annually, individuals can gift up to $16,000, as of 2022, without chipping away at any of their lifetime exemption. With such generous exemption amounts, the need for loans between family members isn’t as prevalent as even a few years ago, with many opting to gift money instead of offering up a loan.
However, this seemingly clear-cut option could change in the next few years. The $12.06 million lifetime exemption will be cut in half at the beginning of 2026, and, if new tax legislation is passed, that amount could become effective even sooner.
