How Much Can You Gift Your Children Per Year?

Gifting money or assets to family members, including children, is a common practice for many individuals. It can serve as an effective way to transfer wealth, provide financial support, or assist with significant life events. However, these transfers are subject to specific tax rules established by the Internal Revenue Service (IRS). Understanding these regulations is important to ensure compliance and to avoid unintended tax consequences. Navigating the complexities of gift tax laws allows for informed financial planning and effective wealth transfer strategies.

The Annual Gift Tax Exclusion

The annual gift tax exclusion allows individuals to give a certain amount of money or property to another person each year without incurring gift tax or affecting their lifetime exemption. For 2024, this annual exclusion amount is $18,000 per recipient. This exclusion is applied per donor, per recipient, per year.

For example, a single parent can gift $18,000 to each of their children without using any of their lifetime gift tax exemption or needing to file a gift tax return (Form 709). If both parents wish to gift to a child, they can each use their individual annual exclusion. This effectively doubles the amount that can be given tax-free to a single recipient in a year, allowing a married couple to gift up to $36,000 to one individual in 2024 without triggering gift tax reporting requirements.

Gifts That Do Not Count Towards the Exclusion

Certain types of payments or transfers are not considered taxable gifts and therefore do not count towards the annual exclusion amount, regardless of their value.

One category includes direct payments for qualified medical expenses. To qualify, these payments must be made directly to the medical service provider for medical care. This exclusion does not apply if the funds are given to the individual who then pays the provider. Examples include payments for medical insurance premiums, prescription drugs, or direct payments to hospitals or doctors for medical services.

Another exclusion covers direct payments for qualified tuition expenses. These payments must be made directly to the educational institution for tuition. This exclusion does not extend to other educational costs such as books, supplies, room and board, or other living expenses; these would count against the annual exclusion if provided to the student directly. The payment must go directly to the school, not to the student.

Other unlimited exclusions exist for gifts made to political organizations and to qualified charities. These specific exclusions do not require the filing of a gift tax return.

Gifting Above the Annual Exclusion

When an individual gifts an amount exceeding the annual gift tax exclusion to a single recipient in a given year, the excess amount reduces their lifetime gift tax exemption. This exemption, also known as the unified credit, is a cumulative amount that an individual can gift during their lifetime or transfer at death without incurring federal gift or estate tax. For 2024, the lifetime gift tax exemption is $13.61 million per individual.

Gift tax is only paid if the cumulative taxable gifts made over a donor’s lifetime (those exceeding the annual exclusions each year) surpass this lifetime exemption amount. For instance, if a parent gifts $20,000 to a child in 2024, the $2,000 exceeding the $18,000 annual exclusion would reduce the parent’s $13.61 million lifetime exemption by $2,000.

Even if no gift tax is immediately due, a donor is required to file Form 709, Gift Tax Return, if a gift to any one person exceeds the annual exclusion amount. This form reports the gift to the IRS and tracks the portion of the lifetime exemption used, even when no tax liability arises.

Special Gifting Considerations

Married couples have an advantageous option called “gift splitting,” which allows them to combine their individual annual gift tax exclusions. Through gift splitting, a married couple can combine their annual exclusions for a single recipient. This effectively treats a gift made by one spouse as if it were made one-half by each spouse. To elect gift splitting, both spouses must consent and sign Form 709, even if only one spouse physically made the gift.

Gifts are not limited to cash; they can also include property such as real estate or stock. When gifting property, the fair market value of the asset at the time of the gift determines its value for gift tax purposes. This valuation is used for calculating whether the gift exceeds the annual exclusion or impacts the lifetime exemption.

When a recipient receives a gifted asset, their tax basis in that asset is the donor’s adjusted basis just before the gift. This “carryover basis” will be used to determine any capital gains or losses if they later sell the property. If gift tax was paid on the gift, the recipient’s basis may be increased by a portion of the gift tax paid, specifically that attributable to the net increase in the asset’s value.