Can I Gift Money to My Children? Tax Rules and Exemptions

Federal tax laws permit transferring money to children and other individuals. While a gift tax system exists, most transfers do not result in an actual tax payment due to various IRS exclusions and exemptions. Understanding these rules is important for anyone considering financial gifts.

General Rules for Gifting Money

For IRS purposes, a “gift” is any transfer to an individual, directly or indirectly, where nothing or less than full value is received in return. This includes money, property, or assets. The giver, or donor, is generally responsible for paying any potential gift tax, not the recipient. However, if the assets generate income, such as interest or dividends, the recipient typically pays income tax on that income.

The gift tax system prevents individuals from avoiding estate taxes by giving away significant wealth before death. This ensures large wealth transfers, whether during life or at death, are accounted for within the tax system. Most gifts do not incur an actual tax liability due to various exemptions.

Annual and Lifetime Gift Tax Exemptions

The annual gift tax exclusion allows an individual to give a certain amount to any number of people each year without incurring gift tax or using their lifetime exemption. For 2025, this amount is $19,000 per recipient. A donor can give $19,000 to each child, grandchild, or other individual, and these gifts are tax-free and do not need to be reported to the IRS. This exclusion resets every year, providing an ongoing opportunity for tax-free transfers.

Married couples can increase this amount through “gift splitting,” combining their individual annual exclusions to effectively double the tax-free amount per recipient to $38,000 for 2025. For gift splitting, both spouses must consent and be legally married for the entire year. This allows married couples to transfer substantial wealth without incurring gift tax liability or reducing their lifetime exemption.

Beyond the annual exclusion, a cumulative lifetime gift tax exemption, also called the unified credit, applies to gifts exceeding the annual exclusion amount. For 2025, this lifetime exemption is $13.99 million per individual. Any gift portion exceeding the annual exclusion reduces this lifetime exemption. This exemption is unified with the federal estate tax exemption, meaning amounts used for gifts during life reduce the amount available for transfers at death. Gift tax is typically only paid if cumulative taxable gifts over a person’s lifetime exceed this lifetime exemption.

Specific Gift Exemptions

Certain payments are excluded from gift tax, meaning they do not count against the annual exclusion or lifetime exemption, regardless of amount. These exclusions facilitate support for medical care and education, applying to payments made directly to the service provider or educational institution.

Direct payments for qualified medical expenses are exempt from gift tax. To qualify, payments must be made directly to the medical care provider, such as a hospital, doctor, or dentist. This exclusion covers expenses for diagnosis, treatment, disease prevention, or medical insurance payments. Reimbursing an individual for medical expenses they have already paid does not qualify.

Direct payments for qualified educational expenses are also exempt from gift tax. Payments must be made directly to the educational institution, such as a college, university, or private school. This exemption applies exclusively to tuition costs and does not extend to other educational expenses like room and board, books, or supplies. As with medical expenses, giving money directly to the student for tuition does not qualify; the payment must go directly to the institution.

Reporting Gifts to the IRS

While many gifts are tax-free, certain situations require filing IRS Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return. This form must be filed when gifts to any one individual in a calendar year exceed the annual gift tax exclusion. Even if no gift tax is owed, filing Form 709 tracks the lifetime exemption used.

Form 709 filing is also required when married couples elect to “split gifts” to utilize both spouses’ annual exclusions, even if the total gift is within the combined exclusion. Both spouses typically need to file a separate Form 709. Additionally, gifts of “future interests” must be reported on Form 709, regardless of value. A future interest is a gift where the recipient’s right to use, possess, or enjoy the property is delayed until a future date.

The donor is responsible for filing Form 709. The deadline is generally April 15 of the year following the gift, aligning with the federal income tax filing deadline. An extension for filing an income tax return also extends the Form 709 deadline.