Can a Parent Gift Money to a Child?

Parents can gift money to their children. However, specific rules and considerations apply, particularly concerning federal tax implications and potential effects on the child’s financial aid eligibility or the parent’s eligibility for certain government benefits.

Federal Gift Tax Basics

The Internal Revenue Service (IRS) imposes a federal gift tax on transfers of money or property for which the giver does not receive equal value in return. The donor, not the recipient, is responsible for paying any gift tax. Most individuals do not owe federal gift tax due to available exclusions and exemptions.

The annual gift tax exclusion allows a donor to give a certain amount of money or property to any individual each year without incurring gift tax or requiring a gift tax return. For 2025, this amount is $19,000 per recipient. A parent can gift up to $19,000 to each child annually without affecting their lifetime gift tax exemption.

Should a gift exceed the annual exclusion, the excess typically reduces the donor’s lifetime gift tax exemption. The lifetime gift and estate tax exemption is $13.99 million per individual. This large exemption means most gifts exceeding the annual exclusion will not result in immediate gift tax payments, but rather draw down this lifetime limit.

Married couples can “split” gifts, effectively doubling the annual exclusion per recipient. For example, a married couple could jointly give up to $38,000 to one child. Even when no tax is due, gifts exceeding the annual exclusion require the donor to file IRS Form 709.

Gifts for Specific Needs

Certain payments are not considered taxable gifts, even if they exceed the annual exclusion. These exclusions are unlimited in amount, provided they are made directly to a qualified institution or provider.

Qualified educational expenses are one such exclusion. Parents can pay an unlimited amount for a child’s tuition directly to an educational institution without it being considered a taxable gift. The payment must be made directly to the institution, not to the child. This exclusion covers tuition costs, but not other educational expenses like room, board, books, or supplies.

Qualified medical expenses also have an unlimited exclusion. Payments made directly to a medical care provider for a child’s medical care are not subject to gift tax. This includes expenses for diagnosis, treatment, or medical insurance. The payment must go directly to the healthcare provider or insurance company, not to the child.

Impact on Other Financial Matters

Gifting money can have broader implications beyond gift tax, affecting a child’s eligibility for financial aid or a parent’s eligibility for certain government benefits. These impacts should be considered for comprehensive financial planning.

Cash gifts received by a child can be counted as student income on the Free Application for Federal Student Aid (FAFSA). Student income is generally assessed at a higher rate than parental assets when calculating financial aid eligibility. Gifts given directly to the student or held in their name can reduce the amount of aid they qualify for.

For parents, making large gifts can affect eligibility for Medicaid, particularly for long-term care benefits. Medicaid generally employs a “look-back period” of five years from the date of application for long-term care services. Gifts made during this look-back period can trigger a penalty period of ineligibility for Medicaid benefits. The penalty period length is determined by dividing the gifted amount by the average monthly cost of nursing home care in the state.

Large gifts can also impact a child’s eligibility for other means-tested government benefits, such as Supplemental Security Income (SSI). These programs have strict income and asset limits. If a gift increases the child’s assets above these thresholds, it could lead to a reduction or loss of benefits.