Gifts

• In 2010, the gift tax exclusion was for amounts less than $13,000, or for amounts the taxpayer pays to a medical or educational institution directly. Under either of the circumstances, a parent could give money to her child without having to pay a gift tax. Otherwise, there is an applicable tax on any amounts that the parent gives to her child. The exclusion is increased to $26,000 for taxpayers that are married and file jointly.
  
  

Loans

• Money given to a child as a loan is subject to taxation if the parent does not charge interest at a rate applicable to the federal rate, known as imputed interest. The taxpayer includes the phantom interest in her income for each year the loan is outstanding. There is an exception for gift loans, whereby if the amount of the loan is less than $100,000 and the borrower has less than $1,000 in investment income for the year, imputed interest rules do not apply.
  
  

Inheritance

• The Internal Revenue Service applies an estate tax to most inheritances. Any money given to a child upon the death of a taxpayer is subject to taxation at a rate of 35 percent on estates exceeding $5 million. In 2010, the Internal Revenue Service lifts the estate tax, so that it is zero percent no matter how much the estate is worth.
  
  

Unified Credit

• For a taxpayer's entire tax paying life, he can apply a unified credit against any taxes due for gift or estate purposes. A credit is a dollar-for-dollar reduction against tax liability, or taxes due. The total for gift tax purposes is $1 million of gifts in 2010, equating to a credit of $345,800. The estate tax credit is unlimited in 2010, but returns in 2011 with a limit of $1 million or a $345,800 credit.