How Much Can You Pay a Child Tax-Free?
Navigate the tax rules for giving money to children and how much they can earn or receive tax-free. Optimize financial support for their future.
Families face unique tax considerations when managing finances involving children. Federal tax rules and exclusions determine how money or assets can be transferred or earned without immediate tax liabilities for the giver or recipient. These regulations help families make informed decisions about supporting a child’s present needs or future financial security, covering direct gifts, a child’s income, and specialized savings vehicles.
Tax-Free Gifts to Children
Individuals can provide financial support to children without federal gift tax obligations, provided certain conditions are met. The annual gift tax exclusion allows a donor to give up to $19,000 to any number of individuals in a calendar year without federal gift tax or requiring a gift tax return (IRS Form 709). This exclusion is per recipient; a married couple can collectively give $38,000 to each person annually without tax implications. This provision is detailed under Internal Revenue Code Section 2503.
Beyond the annual exclusion, certain direct payments made on behalf of a child are also considered tax-free gifts and do not count against the annual limit. Internal Revenue Code Section 2503 outlines this exclusion for qualified educational and medical expenses. Specifically, direct payments made to an educational institution for tuition, or to a medical provider for medical care, are not treated as taxable gifts. It is crucial that these payments are made directly to the institution or provider, not to the child, for them to qualify for this unlimited exclusion. For instance, while tuition payments are covered, expenses like books, supplies, or room and board generally are not, unless bundled into a single tuition fee by the institution.
A Child’s Income and Tax Obligations
A child’s income and corresponding tax obligations depend on the type of income received and the total amount. Children generally have their own filing requirements based on their earned income (from a job) and unearned income (from investments). For the 2025 tax year, a dependent child must file a tax return if their unearned income exceeds $1,350, or if their earned income exceeds $15,750. A filing requirement also exists if their gross income is more than the greater of $1,350 or their earned income plus $450, up to the standard deduction limit for their filing status.
The standard deduction for a dependent child can reduce or eliminate their tax liability. For 2025, a dependent’s standard deduction is limited to the greater of $1,350 or the sum of $450 plus their earned income. This amount cannot exceed the standard deduction allowed for a single filer, which is $15,750 in 2025. For example, a child earning $5,000 in wages would have a $5,450 standard deduction ($5,000 + $450), reducing their taxable income.
The “Kiddie Tax,” outlined in Internal Revenue Code Section 1, aims to prevent parents from shifting investment income to children to avoid higher tax brackets. This tax applies to a child’s unearned income, such as interest, dividends, and capital gains, above a certain threshold. For 2025, the first $1,350 of a child’s unearned income is tax-free due to the standard deduction, and the next $1,350 is taxed at the child’s own marginal tax rate. Any unearned income exceeding $2,700 for 2025 is then taxed at the parent’s marginal income tax rate, which is typically higher. The Kiddie Tax generally applies to children under age 18 at the end of the tax year.
Tax-Advantaged Ways to Fund a Child’s Future
Specific financial vehicles and strategies offer tax advantages for funding a child’s future. One popular option is a 529 plan, designed primarily for educational expenses. Contributions to a 529 plan grow tax-free, and withdrawals are also tax-free when used for qualified education expenses, which include tuition, fees, books, supplies, and room and board for eligible institutions. While there are no federal annual contribution limits for 529 plans, contributions are considered gifts for tax purposes. Many states also offer tax deductions or credits for 529 plan contributions.
Another option for educational savings is a Coverdell Education Savings Account (ESA). Similar to 529 plans, ESAs offer tax-free growth and tax-free withdrawals for qualified education expenses. A key difference is that Coverdell ESAs have a lower annual contribution limit, set at $2,000 per beneficiary per year across all accounts. These accounts also have income limitations for contributors. Coverdell ESAs offer broader qualified expense categories than 529 plans, including K-12 education expenses in addition to higher education costs.
Employing a child in a family business can offer notable tax advantages. The wages paid to the child are deductible as a business expense for the parent’s business, reducing the business’s taxable income. Wages paid to a child under age 18 by a parent’s sole proprietorship or a partnership where both partners are parents are exempt from Social Security (FICA) and Medicare taxes. The child’s wages are considered earned income, which benefits from the dependent standard deduction, potentially allowing the child to earn a significant amount tax-free. This strategy can shift income from a higher-taxed parent to a lower-taxed child, reducing the overall family tax burden.