It's quite hard for kids to manage their finances after leaving their parent’s shelter. So, parents will also continue to support them financially. The best example would be paying the mortgage on behalf of their kids. However, if you are one of those parents, you're normally not getting a deduction, and you might even get a gift tax bill.
Liability requirement issues
To get a deduction of mortgage interest on taxes, you must be directly liable for the mortgage debt legally and it must be secured by your ownership. If your child is the actual borrower of the mortgage and you have no ownership rights on the house, you're not legally attached to the debt. So, in spite of paying the mortgage behalf of your child, pay them the money directly. You can’t deduct the mortgage interest on your taxes, but if you give the money to your child directly for paying the mortgage, your child may get the tax deduction.
Taxable gift issues
When you transfer a certain amount to your child, it’ll be considered as a gift. There is a certain amount that you’re allowed to provide your children every year. That amount is totally exempted from gift taxes. As per the tax law of 2013, the amount is $14,000 per year. If you provide any excess money over that amount, it’ll be counted as a taxable gift. For example, if you give your son $25,000 for a mortgage in 2013, you're extra $11,000 will be counted as a taxable gift.
Unified credit issues
Apart from the gift tax credit, the IRS also provides every person a certain unified credit. It is known as the lifetime exclusion. The unified credit amount fixed in 2013 is $5.12 million. If your gift exceeds the $13,000 gift tax credit, the excess amount will be covered by the unified credit. The unified credit is valid for lifetime and can be used only once. For example, if your total gift amount touches the mark of $5.12 million, the amount of any gift that gets over the $13,000 gift tax will be taxed.
Multiple gifts issues
You and your spouse can contribute up to the annual exclusion limit without stepping into the gift tax borderline. You must file Form 709 and agree to split the gift between you and your spouse. As long as you pay a lesser amount than the limit, you’ll be safe from the gift tax return. However, if any of you crosses the limit, by doing some paperwork you can solve the problem. The IRS considers "gift splitting," through which you can split any gift you make with your spouse. You and your spouse can pay up to $28,000 per year without any hassle towards your children's mortgages.
Gift tax bill issues
A certain amount of the assets of each person is normally exempt from estate and gift taxes. As of 2013, that amount is $5,250,000. If you use any part of that exempted amount during your lifespan, it’ll lower the money you can leave to your heirs. For example, if you’ve given $3 million to your children towards mortgage payments and others during your total lifespan. After your death, only the first $2.25 million from your estate assets will be exempted from estate taxes.
At the end, be careful if your child asks for cosigning a mortgage loan rather than having direct financial help. While co-signing might be a more lucrative option, it is very risky too. If your child fails to pay the mortgage, you’ll be totally responsible for making those payments as per the law. If you can’t afford the payments, you might have to face foreclosure or any other court judgments. It will badly damage your credit report. Finally, this situation can become worse if your relationship with your children gets affected.