Can I Gift My Child Money? Tax Rules Explained

Giving monetary gifts to children is a common practice, often intended to support their education, help with significant life events, or contribute to their financial well-being. Understanding the specific tax implications and regulations that govern these financial transfers is important. Navigating these rules ensures both the giver and recipient avoid unintended tax consequences, helping families make informed decisions about transferring wealth.

Gift Tax Basics and Exclusions

The federal gift tax applies to transfers of money or property for which the giver receives nothing, or less than full value, in return. Most individuals will not owe federal gift tax due to generous exclusions. The donor, the individual making the gift, is typically responsible for paying any gift tax that may be due, not the recipient.

The annual gift tax exclusion allows an individual to give up to $19,000 per recipient each year without incurring gift tax or requiring a gift tax return. For example, a person can give $19,000 to their child, grandchild, and a friend in the same year without gift tax implications.

Gifts exceeding the annual exclusion amount reduce the donor’s lifetime gift tax exemption. This exemption is the total amount an individual can give away over their lifetime, beyond the annual exclusions, without owing federal gift tax. For 2025, the lifetime gift tax exemption is $13.99 million per individual. Any portion of a gift exceeding the annual exclusion is subtracted from this lifetime exemption amount.

Married couples can significantly increase their gifting capacity through “gift splitting.” This allows them to combine their individual annual exclusions, effectively doubling the amount they can give to a single recipient each year. For 2025, a married couple can collectively gift up to $38,000 to one person without using their lifetime exemption or filing a gift tax return, even if the money comes from only one spouse. If a married couple elects to split gifts, they must file a gift tax return (Form 709) to formally make this election, even if no tax is due.

Recipient Considerations for Gifting

When a child receives a monetary gift, they generally do not incur federal income tax on the amount received. The Internal Revenue Service (IRS) considers gifts as non-taxable income for the recipient.

However, once the gifted money is received, any income generated from investing that money, such as interest, dividends, or capital gains, becomes taxable to the child. For instance, if the child invests the gifted funds in a savings account that earns interest, that interest income would be subject to income tax. Similarly, if the child invests in stocks that pay dividends or are sold for a profit, those earnings are taxable.

The presence of gifted money can also influence a child’s eligibility for financial aid for college. Assets held directly in the child’s name, such as those in a Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) account, are assessed more heavily in financial aid calculations, like the Free Application for Federal Student Aid (FAFSA), than assets held in a parent’s name. This higher assessment rate for student-owned assets means a larger percentage of these funds is expected to be used for educational costs, potentially reducing the amount of need-based financial aid awarded.

Effective Gifting Methods

Beyond direct cash transfers, several structured methods exist for gifting money to a child, each with distinct tax implications and levels of control. These methods offer various ways to support a child’s financial future.

Direct Payments for Education or Medical Expenses

Direct payments for qualified education or medical expenses are not considered taxable gifts. Payments for tuition made directly to an accredited educational institution, or for medical expenses made directly to a healthcare provider, do not count against the annual gift tax exclusion or lifetime exemption. This exclusion applies only to tuition, not to other educational costs such as room, board, books, or supplies, and requires the payment to be made directly to the institution or provider.

529 Plans

A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs. Contributions to a 529 plan are considered gifts for tax purposes and are subject to the annual gift tax exclusion. For 2025, individuals can contribute up to $19,000 to a 529 plan beneficiary without triggering gift tax. A special rule allows for a lump-sum contribution of up to five times the annual exclusion, or $95,000 for an individual in 2025 ($190,000 for married couples), to be treated as if it were made over a five-year period, without incurring gift tax. Funds in a 529 plan grow tax-deferred, and withdrawals are tax-free when used for qualified education expenses.

Custodial Accounts (UGMA/UTMA)

Custodial accounts, established under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA), allow an adult to manage assets for a minor until they reach the age of majority, which is typically 18 or 21, depending on the state. Contributions to these accounts are considered irrevocable gifts to the child. Investment income generated within these accounts may be subject to the “kiddie tax” rules. Under these rules, a portion of the child’s unearned income (e.g., interest, dividends) is taxed at the child’s lower tax rate, but income exceeding a certain threshold ($2,700 for 2025) is taxed at the parent’s marginal tax rate.

Reporting Requirements for Gifts

A gift tax return, IRS Form 709, is generally required only if a gift exceeds the annual exclusion amount. For 2025, this threshold is $19,000 per recipient. If a gift is made to any one individual that totals more than this amount in a calendar year, the donor must file Form 709 to report the transfer.

The donor is solely responsible for filing Form 709. This form must be filed by April 15 of the year following the gift, aligning with the typical income tax filing deadline. An extension for filing an income tax return (Form 1040) automatically extends the deadline for Form 709.

Filing Form 709 does not necessarily mean that gift tax is owed. The primary purpose of the form is to track gifts that exceed the annual exclusion, so these amounts can be applied against the donor’s lifetime gift tax exemption. Only once the cumulative taxable gifts over a donor’s lifetime surpass the lifetime exemption amount will federal gift tax actually be due. The form requires details such as the donor’s and recipient’s information, a description of the gifted property, and its fair market value.