How Much Money Can You Gift Your Children?
Gift money to your children wisely. Understand IRS tax rules and guidelines for secure family financial planning.
Giving monetary gifts to children can provide financial support, but understanding tax implications is important. A gift is a transfer of money or property without receiving equal value in return. While many transfers occur without tax consequences, specific rules govern federal gift tax regulations. These guidelines determine if a gift needs reporting to the Internal Revenue Service (IRS) or if any tax liability arises.
Annual Gift Tax Exclusion
The annual gift tax exclusion allows individuals to transfer money or property each year without incurring gift tax or using their lifetime exemption. Gifts up to this amount generally do not require a gift tax return. For 2024, this annual exclusion is $18,000 per recipient. This amount is subject to periodic adjustments for inflation, so verify the current year’s figure.
This exclusion applies “per donor, per donee, per year.” For example, an individual can gift $18,000 to one child, another child, and a grandchild, all within the same year, without gift tax implications or reporting.
Married couples can use “gift splitting.” If both spouses consent, they can combine their annual exclusions, gifting twice the annual exclusion amount to a single recipient. In 2024, a married couple could collectively gift $36,000 to one child without triggering gift tax or using their lifetime exemption. To elect gift splitting, both spouses must be U.S. citizens or residents at the time of the gift, and signify their consent on Form 709, even if no tax is due.
Lifetime Gift Tax Exemption
When gifts exceed the annual exclusion, the excess reduces the donor’s lifetime gift tax exemption. This exemption represents the total cumulative amount an individual can gift over their lifetime, beyond the annual exclusion, before federal gift tax becomes payable. The lifetime gift tax exemption is unified with the estate tax exemption, limiting the total value of assets transferable free of federal estate tax upon death.
For 2024, the combined lifetime gift and estate tax exemption is $13.61 million per individual. Most individuals will not pay federal gift tax during their lifetime, even with large gifts exceeding the annual exclusion. These larger gifts decrease the exemption available for future gifts or for their estate upon death.
Form 709 must be filed for any gift exceeding the annual exclusion, even if no tax is immediately due because the lifetime exemption is used. This reporting ensures the IRS tracks cumulative gifts. Gifts above the annual exclusion utilize the lifetime exemption and require reporting.
Exempt Categories of Gifts
Beyond the annual exclusion and lifetime exemption, certain gifts are exempt from federal gift tax rules and do not count towards these limits. These categories allow for substantial transfers without gift tax implications, provided they meet strict conditions.
One exemption applies to payments for qualified education expenses. This covers tuition paid directly to an educational organization, such as a college or university, on behalf of another individual. The payment must go straight to the institution, not to the student or parent, and only covers tuition. Other educational costs, like books or living expenses, are not covered unless paid directly to the institution as part of tuition.
Payments for qualified medical expenses are also exempt from gift tax. This includes amounts paid directly to a healthcare provider for another individual’s medical care. As with education expenses, the payment must be made directly to the provider, not to the person receiving care.
Other exempt categories include gifts to a U.S. citizen spouse, which are generally unlimited due to the marital deduction. Contributions to qualified political organizations are also exempt from gift tax.
Reporting Gifts to the IRS
When gift thresholds are exceeded or specific elections are made, donors must report these transactions to the Internal Revenue Service (IRS). This reporting is done using Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. Filing this form does not necessarily mean gift tax is owed, but informs the IRS to track lifetime exemption use.
Form 709 must be filed if a gift to any individual exceeds the annual gift tax exclusion. For example, if a 2024 gift to one child is $20,000, exceeding the $18,000 annual exclusion, Form 709 is required. If married spouses elect to split gifts, Form 709 must be filed, even if the gifted amount is within the combined exclusion, as this signifies the election. The form is also required for gifts not considered “present interests,” such as certain transfers into trusts.
To complete Form 709, the donor provides identifying information for themselves and the recipient. They must also provide a detailed description of the gifted property, the gift date, and its fair market value. The form guides the filer on how the annual exclusion and, if necessary, the lifetime exemption are applied. Form 709 and its instructions are available on the IRS website.
The deadline for filing Form 709 is generally April 15th of the year following the gifts. If an income tax extension is filed, it automatically extends the time to file Form 709. The completed form is mailed to the IRS center specified in the form’s instructions.