Are Gifts to Children Tax Deductible?

Are Gifts to Children Tax Deductible?

Making financial gifts to children is a common practice for many families, often intended to provide support or help with significant life events. A common misunderstanding is whether these gifts can be claimed as a tax deduction. For the donor, gifts to children or other individuals are generally not tax deductible on their income tax return. This article explains the rules surrounding gifts, outlining when they might be subject to gift tax and when they are not.

The Donor’s Gift Tax Obligation

Gifts, including those made to children, are not tax deductible for the donor on their federal income tax return. The federal gift tax is a levy on the transfer of property by one individual to another while receiving nothing, or less than full value, in return. The responsibility for paying any applicable gift tax falls on the donor, not the recipient. This system complements the estate tax, preventing individuals from avoiding estate taxes by giving away substantial assets during their lifetime.

Most gifts will not result in an actual gift tax payment due to exclusions and a substantial lifetime gift tax exemption. The lifetime gift tax exemption, under Internal Revenue Code Section 2505, allows individuals to give away a significant amount of assets over their lifetime without incurring gift tax. For 2025, this lifetime exemption amount is $13.99 million. Gifts exceeding the annual exclusion amount reduce this lifetime exemption, with actual gift tax becoming due only when cumulative gifts surpass the exemption.

Transfers Not Considered Taxable Gifts

Certain types of transfers are specifically excluded from being considered taxable gifts, regardless of their amount. These transfers do not count against the annual gift tax exclusion or the lifetime exemption.

One notable exclusion applies to direct payments for qualified educational expenses. Under Internal Revenue Code Section 2503(e), tuition payments made directly to an educational institution on behalf of another individual are not considered taxable gifts. This exclusion applies only to tuition; expenses such as books, supplies, room, or board do not qualify. The payment must be made directly to the educational organization, not to the student or their parent, for this exclusion to apply.

Similarly, direct payments for medical care expenses are also excluded from gift tax under Internal Revenue Code Section 2503(e). This covers amounts paid directly to a medical provider for diagnosis, treatment, prevention of disease, or for the purpose of affecting any structure or function of the body. Payments for medical insurance also qualify for this exclusion. The payment must go directly to the medical care provider, not to the individual receiving the care.

Other transfers not subject to federal gift tax include gifts to a spouse who is a U.S. citizen, which benefit from an unlimited marital deduction. Gifts made to qualified political organizations or to qualified charitable organizations are also generally exempt from gift tax.

The Annual Gift Exclusion

The annual gift tax exclusion, provided under Internal Revenue Code Section 2503(b), allows individuals to give a certain amount each year to any number of recipients without triggering gift tax or using any portion of their lifetime exemption. This exclusion applies on a per-recipient basis. For example, a donor can give the maximum exclusion amount to each of their children, grandchildren, and any other individual in a given year.

For 2025, the annual gift tax exclusion amount is $19,000 per recipient, an increase from $18,000 in 2024. This amount is adjusted periodically for inflation. Gifts up to this threshold are considered tax-free and do not require reporting to the IRS.

Married couples have an additional advantage through “gift splitting” under Internal Revenue Code Section 2513. If both spouses consent, they can combine their individual annual exclusions to give double the amount to a single recipient in a year. For instance, in 2025, a married couple could collectively give $38,000 to one person without incurring gift tax or utilizing their lifetime exemption. Gift splitting applies to gifts made by either spouse to third parties.

Gifts exceeding the annual exclusion amount to a single recipient in a year generally do not result in immediate gift tax payment. Instead, the amount above the exclusion reduces the donor’s available lifetime gift tax exemption.

When to Report Gifts

While many gifts fall within the annual exclusion and do not require reporting, certain circumstances necessitate filing Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. This form reports transfers subject to federal gift tax and allocates the lifetime generation-skipping transfer exemption. Filing Form 709 does not automatically mean gift tax is owed; it often serves to track the use of the donor’s lifetime exemption.

A donor is required to file Form 709 if gifts to an individual exceed the annual gift tax exclusion for the year. For 2025, this threshold is $19,000. Even if no gift tax is immediately due because of the lifetime exemption, the IRS needs to track the cumulative amount of these gifts.

Filing is also required when electing to split gifts with a spouse, regardless of whether the amount gifted is above the annual exclusion. This election treats one spouse’s gift as made half by each spouse, requiring both to signify consent, typically on Form 709. Additionally, gifts that are not of a “present interest,” such as certain gifts to trusts where the recipient does not have immediate use and enjoyment of the property, generally require reporting on Form 709, even if the value is below the annual exclusion.

The filing deadline for Form 709 is typically April 15th of the year following the gift. An extension for filing an individual income tax return (Form 1040) can automatically extend the time to file Form 709.