Gift Tax

• The IRS taxes gifts that you pay to family members. This is to prevent you from avoiding estate taxes upon your death. However, the IRS lets you give family members a certain amount annually -- $13,000 in 2011 -- without paying the gift tax. If you have a spouse and your child has a dependent, for example, both of you can give a total of $36,000 each to your family for a sum of $78,000 tax-free toward the child's mortgage.
  
  

Mortgage Tax Deduction

• Only the person legally obligated to pay the mortgage can deduct interest payments. If you are on the mortgage as a co-signer, a payment for the mortgage allows you to deduct the interest. If you are not on the mortgage, nobody receives the deduction unless your child paid some money on the mortgage in the current tax year. Thus, you might want to add yourself to the mortgage so you can deduct the interest. This is a low risk option if you plan to pay off the entire balance at once. However, the IRS limits the mortgage interest deduction to no more than more than $1 million of home acquisition debt per person in 2011.
  
  

Private Contract

• Your child can take the mortgage interest deduction if you lend him money to pay for the mortgage. You and your child would have to have a notarized contract that meets the lending standards for a mortgage in your state and secure it with the home. In addition, you must charge your child a minimum rate -- 4.4 percent in 2010. The child also must itemize his return to claim mortgage interest, so attorney fees to prepare the contract might exceed the value of the deduction.
  
  

Reporting

• If you want to claim the annual gift tax exclusion, you must file Form 709 and agree to split the gift between you and your spouse, and other dependents. As with any type of financial planning, you should consult with an accountant. In addition, you should also talk to a real estate agent about other ways for you and your spouse to gift money and avoid estate taxes, such as setting up a trust for additional sheltering of your assets.