Q&A: The advantage of tax-free gifts for your children

Q: A colleague told me I can give a certain amount of money, tax-free, to my kids each year. Is that true? Will it lower my taxes?

A: The annual federal gift tax exclusion allows you to give $13,000 in 2009 (up from $12,000 in 2008) per recipient to an unlimited number of recipients-including children-without incurring the federal gift tax. This exclusion allows you to distribute your property tax-free and potentially put your estate into a lower tax bracket. The exclusion applies only to gifts of a present interest in property. For example, giving your daughter cash today would qualify, but giving her the right to have your house in three years would not. If you're married, gift-splitting can double the annual gift tax exclusion: You and your spouse can each give $13,000 to a child. To qualify, both you and your spouse must be U.S. citizens making the gift jointly. There is no income tax deduction for gifts made, and no income is recognized by the recipient. Because the income tax rate schedules are graduated, your total family federal and state income tax burden may be reduced if income-producing assets are distributed among several family members, rather than being held in your hands only. A word of caution: Your potential federal income tax savings from transferring income-producing property to your children may be reduced by the so-called "kiddie" tax. For 2009 taxpayers, unearned income (like interest and dividends) above $1,900 may be taxed at the parents' income tax rate. The "kiddie" tax rules apply to those under age 18, those age 18 whose earned income doesn't exceed one-half of their support, and those ages 19 to 23 who are full-time students and whose earned income doesn't exceed one-half of their support.