How Much Can You Pay Your Child Tax-Free?

Parents often seek ways to provide financial support for their children, whether for immediate needs, educational pursuits, or future financial security. Understanding the tax implications of these financial transfers is important, as various rules apply depending on how funds are given or earned. The tax landscape surrounding financial support to children can be complex, involving different tax treatments for gifts, earned income, unearned income, and specialized savings accounts. Navigating these rules efficiently can help families maximize the financial benefit to their children while minimizing their tax obligations.

Tax-Free Gifts to Children

Direct financial gifts to children can be made without triggering gift tax. The annual gift tax exclusion allows an individual to give a certain amount to any number of recipients each year without incurring gift tax or requiring a gift tax return. For 2025, this annual exclusion amount is $19,000 per recipient, meaning a parent can give up to $19,000 to each child within a calendar year without gift tax consequences. A married couple can combine their exclusions, allowing them to give $38,000 to each recipient annually. This exclusion applies to gifts of “present interest,” meaning the recipient has an immediate right to the use, possession, or enjoyment of the gifted property.

Beyond the annual exclusion, certain direct payments for qualified tuition and medical expenses are excluded from gift tax. Internal Revenue Code Section 2503(e) states that payments made directly to an educational organization for tuition or directly to a healthcare provider for medical care are not considered gifts for tax purposes, regardless of the amount. This unlimited exclusion applies in addition to the annual gift tax exclusion. For tuition, payment must be made directly to the qualifying educational institution, covering tuition costs only, not expenses like books, supplies, or room and board; for medical expenses, payment must be made directly to the provider. These direct payment exclusions are common ways individuals can transfer funds tax-free to children.

Child’s Income Tax Considerations

A child’s income can have tax advantages, depending on its type and amount. Income earned from a job is treated differently from unearned income, such as interest, dividends, or capital gains. For a child claimed as a dependent, a certain amount of earned income can be received tax-free due to the standard deduction. For 2025, the standard deduction for a dependent allows a child earning only wages to earn a notable amount without paying federal income tax.

Employing a child in a family business can offer additional tax benefits. Payments for services performed by a child for a parent’s sole proprietorship or a partnership where each partner is a parent are exempt from Social Security and Medicare taxes if the child is under age 18. A broader exemption applies for Federal Unemployment Tax Act (FUTA) taxes, which exempts wages paid to a child under age 21 employed by a parent. The work performed by the child must be legitimate, and the wages paid must be reasonable for the services rendered.

Unearned income is subject to the “Kiddie Tax,” which applies to a child’s unearned income exceeding certain thresholds to prevent parents from shifting investment income to children for lower tax rates. For 2025, the first $1,350 of a child’s unearned income is tax-free due to the standard deduction. The next $1,350 of unearned income is taxed at the child’s own tax rate. Any unearned income exceeding $2,700 for 2025 is subject to the Kiddie Tax and taxed at the parent’s marginal tax rate. This rule primarily affects children under age 19, or full-time students under age 24, who have significant investment income.

Tax-Advantaged Savings for Children

Several specialized accounts provide tax advantages when saving for a child’s future needs, particularly education. One common vehicle is the 529 plan, also known as a Qualified Tuition Program. Contributions to a 529 plan are generally considered gifts and may be subject to the annual gift tax exclusion. A special election allows larger contributions to be spread evenly over five years for gift tax purposes, enabling a donor to contribute up to five times the annual exclusion amount in a single year without incurring gift tax.

A key advantage of 529 plans is that earnings grow tax-deferred, and qualified distributions for educational expenses are tax-free at the federal level, and often at the state level. Qualified educational expenses include tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution. 529 plans can also be used for up to $10,000 per year per beneficiary for K-12 tuition expenses, and for certain professional training programs.

Another type of account for saving for children is a custodial account, established under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA). Funds contributed to these accounts are irrevocable gifts to the child. The custodian manages the assets until the child reaches the age of majority (typically 18 or 21, depending on the state), but the assets are legally owned by the child. Any income generated within an UGMA/UTMA account is taxable to the child and subject to the Kiddie Tax rules, meaning unearned income exceeding specific thresholds will be taxed at the parent’s marginal rate. Unlike 529 plans, there are no restrictions on how the funds in UGMA/UTMA accounts can be used once the child reaches adulthood; they are not limited to educational expenses.