How to Properly Gift Money to Children

Many parents and grandparents provide financial support to younger generations for education, significant life events, or general financial well-being. Understanding the rules governing these transfers is important to manage potential tax implications and ensure compliance with federal guidelines.

Understanding Annual and Lifetime Gift Tax Rules

Federal tax law governs how much an individual can gift without triggering gift tax obligations. The annual gift tax exclusion, authorized by Section 2503(b) of the Internal Revenue Code, allows individuals to give a certain amount to any number of recipients each year without requiring a gift tax return. For 2025, this annual exclusion amount is $19,000 per recipient.

A married couple can combine their annual exclusions through “gift splitting,” allowing them to give up to $38,000 per recipient in 2025 without tax implications. To elect gift splitting, both spouses must consent and file a gift tax return. This strategy allows more wealth to be transferred outside of the taxable estate.

Gifts exceeding the annual exclusion amount reduce an individual’s lifetime gift tax exemption. This exemption, linked with the estate tax exemption, represents the total value of gifts an individual can make over their lifetime and the value of their estate at death, before federal gift or estate taxes are owed. For 2025, the lifetime gift and estate tax exemption is $13.99 million per individual.

Any portion of a gift that exceeds the annual exclusion amount will reduce this $13.99 million lifetime exemption. The gift tax is paid by the giver, not the recipient.

Beyond the annual exclusion and lifetime exemption, certain transfers are exempt from gift tax. Direct payments for qualified educational expenses are not considered taxable gifts under Section 2503(e) of the Internal Revenue Code. This exclusion applies only to tuition paid directly to an educational institution, not to payments for books, supplies, or room and board.

Similarly, direct payments for qualified medical expenses are excluded from gift tax. These payments must be made directly to the medical care provider for diagnosis, treatment, or prevention, or for medical insurance. Both the educational and medical expense exclusions are unlimited and do not reduce the annual exclusion or lifetime exemption amounts.

Common Methods for Gifting Money

Gifting money to children can be accomplished through various methods, each with distinct considerations for managing tax implications. Direct cash gifts are the most straightforward approach, allowing individuals to transfer funds to a child. To remain within the annual gift tax exclusion and avoid reporting requirements, these direct gifts should not exceed $19,000 per recipient per year.

For those looking to save for educational costs, 529 plans offer a tax-advantaged savings vehicle. Contributions to a 529 plan are considered gifts for tax purposes and are subject to the annual gift tax exclusion. Earnings within the plan grow tax-deferred, and qualified withdrawals are federal income tax-free.

Qualified expenses for 529 plans are broad, including tuition, fees, books, supplies, and room and board for students enrolled at least half-time at eligible educational institutions. Up to $10,000 per year can be withdrawn tax-free for K-12 tuition, and beginning July 4, 2025, this expands to include other K-12 expenses like books, materials, tutoring, and exam fees. A special provision allows for “superfunding” or “front-loading” a 529 plan, where up to five years’ worth of annual exclusions (e.g., $95,000 for an individual in 2025) can be contributed at once, provided no other gifts are made to that beneficiary for the next five years.

Custodial accounts, established under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA), hold and manage assets for a minor. Once funds are placed in an UGMA/UTMA account, the gift is irrevocable, meaning the assets legally belong to the child. An appointed custodian manages the account for the child’s benefit until they reach the age of majority, which typically ranges from 18 to 25, depending on state law.

Any amounts exceeding the annual gift tax exclusion ($19,000 in 2025) will reduce the donor’s lifetime gift tax exemption. Income generated within these accounts is taxed to the minor, potentially at lower rates. Upon reaching the age of majority, the child gains full control of the account assets and can use them for any purpose, without restriction.

For more complex gifting strategies, a trust can offer greater control over how and when a child receives funds. Unlike UGMA/UTMA accounts, a trust allows the donor to specify conditions for distribution and can protect assets for a longer period. While setting up a trust involves legal and administrative complexities, it can be a suitable option for significant wealth transfers where the donor desires more oversight than a custodial account provides.

Reporting Gifts to the IRS

When a gift exceeds the annual exclusion amount, the donor is required to report it to the Internal Revenue Service (IRS) by filing Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. This requirement applies even if no gift tax is owed. Filing Form 709 tracks the amount of the gift that reduces the donor’s lifetime gift tax exemption.

Form 709 must be filed if an individual makes gifts to any one person totaling more than $19,000 in 2025. This form is also necessary if married couples elect to split gifts, regardless of the amount, to formally document the consent of both spouses. Gifts of certain future interests, which delay the recipient’s enjoyment of the gift, also require reporting on Form 709, even if they are below the annual exclusion.

The responsibility for filing Form 709 lies with the donor. The form is filed annually, and all reportable gifts made during a calendar year are listed on a single Form 709 for that year. The official deadline for filing Form 709 is April 15th of the year following the calendar year in which the gift was made.

An extension for filing Form 709 can be obtained, typically until October 15th, by filing Form 4868 (an extension for your income tax return) or Form 8892 (a specific extension for Form 709). While an extension grants more time to file, it does not extend the time to pay any gift tax that might be due. Form 709 and its instructions are available on the IRS website.

Completing Form 709 requires information about both the donor and the recipient, including identifying details. The form also requires a description of the gifted property and its fair market value on the date of the gift. Accurate completion ensures proper tracking of the lifetime exemption and compliance with federal tax regulations.