Is a Gift to a Child Tax Deductible?
Unpack the tax treatment of financial gifts given to children. Clarify obligations for givers and recipients under current tax law.
Giving financial support or assets to children often prompts questions about tax consequences for both the giver and the recipient. Understanding how these transfers are treated under tax law is important for anyone considering such actions. This article clarifies the tax implications of gifts to children, distinguishing between income tax deductibility, federal gift tax rules, and the tax situation for the child receiving the gift.
Tax Deductibility for the Giver
Individuals frequently wonder if they can deduct gifts made to their children on their income tax returns. Generally, personal gifts, regardless of their size or purpose, are not tax deductible for the giver under U.S. income tax law. This rule applies whether the gift is cash, property, or other assets given directly to a child. This differs significantly from charitable contributions to qualified organizations or business expenses. Therefore, individuals providing financial support to children cannot claim these amounts to reduce their taxable income.
Federal Gift Tax Rules for the Giver
While gifts are not income tax deductible for the giver, certain gifts may be subject to federal gift tax rules. The gift tax is a tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return. The giver, not the recipient, is generally responsible for paying any gift tax.
The federal gift tax system includes an annual exclusion amount, allowing individuals to give a certain amount to as many people as they wish each year without incurring gift tax or needing to report to the IRS. For 2024, this annual gift tax exclusion is $18,000 per recipient. If a gift to any one person exceeds this amount in a calendar year, the giver must file IRS Form 709 to report the gift.
Even if a gift exceeds the annual exclusion and requires reporting, it does not necessarily mean gift tax is immediately owed. Each individual also has a lifetime gift tax exemption, a cumulative amount that can be gifted over one’s lifetime (or at death as part of the estate) before any gift tax becomes due. For 2024, the lifetime gift tax exemption is $13.61 million per individual. Amounts gifted above the annual exclusion reduce this lifetime exemption, but tax is only paid if the cumulative taxable gifts exceed the lifetime exemption.
Tax Implications for the Child Recipient
For the child receiving a gift, the tax implications are generally straightforward. Gifts received are not considered taxable income to the recipient under U.S. tax law. This means the child does not need to report the value of the gift as income on their federal income tax return. While the gift itself is tax-free for the recipient, any income that the gifted assets generate after they are received may be subject to tax. For instance, if a child receives a gift of cash and invests it, any interest earned, dividends, or capital gains would be taxable income to the child. The taxation of this unearned income for children, particularly those under a certain age, can be subject to “kiddie tax” rules, which may tax some of this income at the parents’ marginal tax rate rather than the child’s lower rate.
Tax Treatment of Common Gift Methods
Specific methods of financial support for children have distinct tax treatments. Direct payments for qualified educational expenses or medical care, made directly to an educational institution or healthcare provider, are generally not considered gifts for gift tax purposes. These payments do not count against the annual gift tax exclusion and do not trigger gift tax reporting requirements, regardless of the amount.
Contributions to a 529 plan, a tax-advantaged savings plan for education expenses, are considered gifts to the plan’s beneficiary and qualify for the annual gift tax exclusion. For larger contributions, a special rule allows the giver to elect to treat a single contribution as if it were made ratably over a five-year period, effectively using five years of the annual exclusion at once. This can be useful for maximizing contributions without incurring gift tax.
Custodial accounts established under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) involve a completed gift to the child. Contributions to these accounts count against the annual gift tax exclusion. Any income generated within these accounts, such as interest or dividends, is taxable to the child and may be subject to “kiddie tax” rules depending on the income amount and the child’s age.