Should I Gift Money to My Child?

Gifting money to children is a common practice for many parents, often driven by a desire to provide financial support or help secure their future. These transfers involve financial and tax implications that warrant careful consideration. Understanding the rules and potential consequences of gifting funds is important for making informed decisions and ensuring parental generosity achieves its intended purpose without unforeseen financial drawbacks.

Key Gift Tax Considerations

When parents gift money or property, federal gift tax rules primarily affect the donor rather than the recipient. A gift is any transfer to an individual where nothing or less than full market value is received in return. Most gifts do not result in immediate tax liability due to specific exclusions and exemptions.

The annual gift tax exclusion allows an individual to give a certain amount to any number of recipients yearly without incurring gift tax or reporting requirements. For 2025, this annual exclusion is $19,000 per recipient. Parents can give $19,000 to each child, and even to each of their children’s spouses, without using any lifetime exemption or filing a gift tax return. Married couples can combine their annual exclusions, gifting up to $38,000 per recipient in 2025 without triggering reporting obligations, provided they elect to split gifts.

Gifts exceeding the annual exclusion amount begin to reduce an individual’s lifetime gift tax exemption. This exemption is a larger amount that can be gifted over a lifetime or passed on at death without federal gift or estate taxes. For 2025, the lifetime gift tax exemption stands at $13.99 million per individual, doubling to $27.98 million for married couples. If a gift surpasses the annual exclusion, the excess is subtracted from this lifetime exemption, but no gift tax is typically owed unless total lifetime gifts exceed this substantial amount.

Certain transfers are exempt from gift tax and do not count against annual or lifetime exclusions. These include direct payments for tuition or medical expenses, provided payments are made directly to the institution or provider. Gifts to a U.S. citizen spouse are also unlimited and exempt from gift tax. Contributions to political organizations are generally not considered taxable gifts.

When gifts exceed the annual exclusion amount, or if spouses choose to split gifts, the donor is generally required to file IRS Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return. This form reports the gift to the IRS and tracks the amount reducing the lifetime exemption. The filing deadline for Form 709 is typically April 15 of the year following the gift. Filing this form does not mean gift tax is due, but it is a necessary reporting step for compliance.

How Gifts Affect Financial Aid

Gifting money to a child can impact their eligibility for need-based financial aid, particularly federal student aid determined by the Free Application for Federal Student Aid (FAFSA). The FAFSA considers both income and assets when calculating a student’s Expected Family Contribution (EFC), which directly influences the amount of aid they may receive. Timing and ownership of gifted funds are significant factors.

Cash gifts received by a student are reported on the FAFSA as untaxed student income. This can negatively affect financial aid eligibility because student income is assessed at a higher rate than parental income or assets. For example, student income may reduce aid eligibility by 50% of the amount over a small allowance.

Assets held directly in a child’s name, such as in a savings account or UGMA/UTMA accounts, are assessed more heavily than parent-owned assets. Student-owned assets can reduce financial aid eligibility by 20% to 25% of their value. This contrasts sharply with parent-owned assets, which are typically assessed at a maximum rate of 5.64%.

The FAFSA uses a “look-back” period to determine income and asset levels. For income, the FAFSA considers tax information from two years prior to the academic year. For example, for the 2026-2027 academic year, the FAFSA uses 2024 tax year income. If a significant cash gift is received during this look-back period, it counts as student income.

Strategic timing of gifts can help mitigate their impact on financial aid. Gifting money long before the FAFSA base years, or after the FAFSA has been filed, may lessen adverse effects. For instance, if funds are gifted and spent on non-countable items like a car or educational expenses before the look-back period, they may not appear as an asset or income on the FAFSA.

Different Ways to Gift Funds

Beyond direct cash transfers, several structured methods exist for gifting funds, each with distinct characteristics and implications. These options offer varying degrees of control, tax benefits, and financial aid impacts.

Direct cash gifts are the most straightforward method for transferring money to children. These gifts are subject to the annual gift tax exclusion, meaning amounts within the limit ($19,000 per recipient in 2025) can be given without tax implications or reporting. Any amount exceeding this exclusion begins to reduce the donor’s lifetime gift tax exemption.

A popular option for educational savings is a 529 plan, a qualified tuition program offering tax-deferred growth and tax-free withdrawals for qualified educational expenses. Contributions to a 529 plan are considered gifts, subject to the annual exclusion. Parents can “superfund” a 529 plan by contributing a lump sum up to five times the annual exclusion amount in a single year, using five years’ worth of exclusions at once (e.g., up to $95,000 for an individual in 2025). This strategy requires filing Form 709 and means no additional tax-free gifts can be made to that beneficiary for five years.

UGMA and UTMA accounts are custodial accounts where assets are held for the minor’s benefit until they reach the age of majority. These accounts allow unlimited contributions; amounts above the annual gift tax exclusion are reportable. Assets in UGMA/UTMA accounts are legally owned by the child, considered student assets for financial aid purposes, and assessed at a higher rate on the FAFSA.

Trusts offer a complex, flexible gifting strategy, particularly irrevocable trusts. These can provide greater control over how and when the child receives funds, and offer estate planning benefits by removing assets from the donor’s taxable estate. Establishing a trust involves legal fees and ongoing administration, making them suitable for larger or more intricate gifting plans.

Paying expenses directly to an institution or provider tax-efficiently supports a child’s education or health. Direct payments for tuition or medical expenses are not considered gifts for tax purposes and do not count against annual or lifetime exclusions. This method allows parents to cover costs without triggering gift tax reporting.

Gifting Appreciated Assets

Gifting appreciated assets, such as stocks or real estate, involves unique tax considerations for giver and recipient. Understanding “basis” is central to navigating these implications.

When an asset is gifted during the donor’s lifetime, the recipient generally receives a “carryover basis.” This means the child’s cost basis for the asset is the donor’s original purchase price, plus any gift tax paid attributable to appreciation. If the child later sells the asset, they are responsible for capital gains tax on the difference between the sale price and this carryover basis.

In contrast, assets inherited at death typically receive a “stepped-up basis.” The basis is adjusted to the asset’s fair market value on the date of the original owner’s death. This can reduce or eliminate capital gains tax for the heir if they sell the asset shortly after inheriting it, as appreciation during the decedent’s lifetime is not taxed.

For highly appreciated assets, it is often more tax-efficient to hold them until death rather than gifting them during life. This allows the asset to receive a stepped-up basis, potentially saving heirs a substantial amount in capital gains taxes. However, gifting appreciated assets can still be a strategy to reduce the donor’s taxable estate during their lifetime.

Gifting depreciated assets is generally not advisable from a tax perspective. If a depreciated asset is gifted, the donor loses the opportunity to claim a capital loss deduction. The recipient also receives a carryover basis, but for determining a loss on a subsequent sale, the basis cannot exceed the fair market value at the time of the gift. This “dual basis” rule means the recipient cannot claim a loss for the decline in value that occurred while the donor owned the asset.