What You Need to Know About Gifting Money to Your Kids and Potential Gift Tax Implications

Understanding Gift Tax Returns: A Guide for Kids and Parents

Giving and receiving gifts is a joyful part of life. Whether it’s a birthday present, a holiday surprise, or a token of love and support, gifts bring us closer to one another. However, when gifts involve money or valuable items, it’s important to understand the gift tax and how it works. This guide will break it down for both kids and parents.

What Is the Gift Tax?

The gift tax is a federal tax that applies when someone gives money or property to another person without expecting anything in return. The purpose of this tax is to prevent people from avoiding estate taxes by giving away their wealth before they pass away.

Does Every Gift Get Taxed?

Not every gift is subject to the gift tax. The IRS allows individuals to give a certain amount of money or property each year without triggering the gift tax. This is called the annual gift tax exclusion. For 2024, this limit is $16,000 per recipient. For 2025, the limit has been adjusted to $17,000 per recipient. This means that parents, grandparents, or anyone else can give up to the respective annual limit to as many people as they want without having to file a gift tax return or pay taxes.

When Do You Need to File a Gift Tax Return?

A gift tax return (Form 709) must be filed if:

• A gift to a single recipient exceeds $16,000 in 2024 or $17,000 in 2025.

• You’re splitting a gift with your spouse to take advantage of the combined exclusion of $32,000 in 2024 or $34,000 in 2025 per recipient.

• You’ve given gifts that use up part of your lifetime gift and estate tax exemption (currently $12.92 million in 2025).

  
  

Examples of Common Gifts

• Cash gifts: Money given directly to a child or relative.

• College savings: Contributions to a 529 plan (with special rules allowing five years of contributions at once).

• Property: Transferring ownership of a car, house, or other valuable assets.

• Loans: Forgiving a loan counts as a gift in the eyes of the IRS.

  
  

What Gifts Are Exempt from the Gift Tax?

Certain gifts are completely exempt from the gift tax, including:

• Gifts to a spouse (as long as they’re a U.S. citizen).

• Direct payments to educational institutions for tuition (not room and board).

• Direct payments to medical providers for someone else’s care.

• Charitable donations to qualified organizations.

  
  

Why Should Parents and Kids Care About Gift Tax?

Parents often use gifts to support their kids—whether it’s helping with college expenses, buying a first car, or starting a savings fund. Understanding gift tax rules ensures that these gifts don’t lead to unexpected tax issues.

For kids, this is a chance to learn about taxes and financial planning. If grandparents give a generous monetary gift, it’s important to know how it’s handled and whether a gift tax return is required.

What Happens If You Exceed the Limits?

If your gifts exceed the annual exclusion limit, the amount over $16,000 in 2024 or $17,000 in 2025 per recipient reduces your lifetime exemption of $12.92 million. For most people, this lifetime limit is high enough that they won’t owe gift tax, but it’s still important to keep track of large gifts.

How to File a Gift Tax Return

1. Gather Information: Record all gifts made during the year, including their value and recipients.

2. Complete Form 709: This IRS form helps you report gifts over the annual exclusion limit and track your lifetime exemption.

3. File by Tax Day: Submit the form along with your income tax return, typically by April 15.

4. Consult a Tax Professional: If you’re unsure about filing requirements, seek advice from a tax expert.

   
   

Teaching Kids About Generosity and Taxes

Gifts are a way to show love and care, but they also come with responsibilities. Teaching kids about the gift tax is an opportunity to discuss generosity, budgeting, and the importance of understanding tax laws. For example, if they receive a large gift, you can involve them in tracking how it’s used or saved.

Key Take aways for Families

• Most gifts are not taxable thanks to the annual exclusion and exemptions.

• Large gifts may require a gift tax return but won’t always result in taxes owed.

• Understanding the rules can help families plan better and avoid surprises.