Gifts that are less than the annual exclusion amount are not subject to the tax. For 2011, the limit is $13,000 per recipient for individuals and $26,000 for married couples who agree to combine their exclusions (a process called "gift splitting") and document that choice by filing a gift tax return.
Tuition and medical expenses paid directly to an educational or medical institution on someone else's behalf are also exempt from taxation.
If you exceed the limit for a gift to any one person during the tax year, you must file a gift tax return, IRS Form 709. You won't owe the tax until you reach the lifetime exemption limit, which is currently $5 million for individuals and $10 million for married couples.
The IRS defines a gift as "any transfer (of property) to an individual, either directly or indirectly, where full consideration is not received in return." So be careful about handing over a house or car for some token amount. The difference between the real value and the payment you receive may be subject to the gift tax.
The impact on family relationships
"Parents need to take a step back and objectively examine the possible implications of the decision to help," Nangle says. "Will it really help your child or is it just enabling them to take the easy way out?"
Another issue to consider, Larsen says, is whether you have other children who will feel slighted or shortchanged because their inheritance will be reduced by the money you spend on their sibling.
Of course, no one would fault a parent for making exceptions to the general hands-off rule in the case of an emergency or a short-term crisis.
"If your adult child is in a financial bind because they were laid off unexpectedly, I don't think it's a problem," Kohler says. "On the other hand, if after two years the kid is just watching MTV and not looking for work, a responsible parent would address the problem."
Create a news alert for "smart spending"