How Much Money Can Parents Give Tax Free?

In the United States, transferring money or property to another individual without receiving something of equal value in return may be considered a gift by the Internal Revenue Service (IRS). The federal gift tax generally applies to the donor, rather than the recipient. Understanding these rules is important for parents who wish to provide financial support to their children without incurring unexpected tax obligations. This article explains the various provisions that allow for tax-free gifts, focusing on the donor’s perspective.

The Annual Gift Tax Exclusion

The annual gift tax exclusion allows an individual to give money or property to any other person each year without incurring gift tax or using their lifetime exemption. For 2024, this annual exclusion amount is $18,000. This means a parent can give $18,000 to each child, and to any number of other individuals, without needing to report or pay gift tax.

The exclusion applies on a “per donor, per recipient, per year” basis. For example, a single parent can give $18,000 to one child and another $18,000 to a second child in the same year, totaling $36,000, all tax-free under the annual exclusion. Married couples can effectively double this amount through “gift splitting,” allowing them to combine their individual annual exclusions to give up to $36,000 to a single child in 2024 without using their lifetime exemption or triggering gift tax. This strategy allows for substantial annual transfers without tax implications.

The Lifetime Gift and Estate Tax Exemption

Beyond the annual exclusion, a unified lifetime gift and estate tax exemption exists, which is the total amount an individual can give away during their lifetime or leave to heirs at death without incurring federal gift or estate tax. For 2024, this exemption amount is $13.61 million per individual. Most gifts exceeding the annual exclusion will not result in gift tax payments.

Any portion of a gift that exceeds the annual exclusion will reduce the donor’s lifetime exemption amount. For instance, if a parent gives a child $28,000 in 2024, the first $18,000 is covered by the annual exclusion, and the remaining $10,000 reduces the parent’s lifetime exemption. Gift tax becomes payable only after total taxable gifts made over a person’s lifetime, combined with their estate at death, exceed this lifetime exemption amount. Married couples can also benefit from portability, which allows the surviving spouse to use any unused portion of their deceased spouse’s lifetime exemption.

Gifts That Are Not Subject to Gift Tax

Certain types of transfers are not considered taxable gifts, regardless of their amount. Direct payments for qualified educational expenses are one such category. This applies to tuition paid directly to an educational institution. Expenses like books, supplies, or room and board do not qualify for this unlimited exclusion.

Similarly, direct payments for medical expenses made directly to the medical provider are also exempt from gift tax. This includes costs for diagnosis, treatment, and medical insurance. Additionally, gifts made to a spouse who is a U.S. citizen qualify for an unlimited marital deduction. Transfers to political organizations and to qualifying charitable organizations are also exempt from gift tax.

Recipient Tax Considerations

A common misconception is that the person receiving a gift must pay income tax on it. Under federal tax law, gifts are not considered taxable income to the recipient. This means that when a parent gives money or property to a child, the child does not need to report the gift as income.

While the gift itself is not taxable income for the recipient, any income generated from the gifted asset is taxable to the recipient. For example, if a parent gifts stocks to a child, and those stocks later pay dividends or are sold for a capital gain, the dividends and capital gains would be taxable income to the child. The tax implications for the recipient arise from the earnings or appreciation of the gifted asset, not from the initial gift.

Reporting Gifts to the IRS

Donors are responsible for reporting certain gifts to the IRS by filing Form 709. This form is required if a gift to any one individual exceeds the annual exclusion amount. Even if no gift tax is due because the lifetime exemption covers the excess amount, filing Form 709 is necessary to track the portion of the lifetime exemption being used.

Form 709 is also required when married couples elect to split gifts, allowing them to combine their annual exclusions for a single recipient. Gifts that fall entirely within the annual exclusion amount do not require reporting to the IRS. The purpose of Form 709 is to provide the IRS with a record of gifts that reduce the donor’s lifetime exemption for estate tax purposes.