What Are the Tax Implications of Gifting Money to Family Members?

You may desire to give money to family members for various reasons. The assets you develop for your children will offer them a significant financial edge in the future. Gifting money to family members might be a pleasant surprise on their birthdays or during the holidays. The gift of money might even help your family members make ends meet during difficult financial circumstances.

However, parents must examine more than just the tax effects of giving money to family before writing a check or forming a trust.

What Are the Tax Laws Concerning Gifting Money to Family Members?

In most cases, a person receiving a gift from their family does not have to pay gift tax. At the federal level, gifts are not taxable income for the recipient. However, there are limitations to how much you can give without reporting requirements or potential tax implications for the giver. 

A gift tax is a federal tax imposed on individuals who transfer money or property to others without receiving full value in return. Because of the annual exclusion, many gifts fall under the IRS’s tax-free threshold, meaning most small to moderate financial gifts between family members have no tax consequences.

In 2025, the IRS allows individuals to give up to $19,000 per recipient each year without needing to file a gift tax return. This is known as the annual gift tax exclusion, and it applies on a per-recipient basis. For example, you can gift $19,000 to your mother, $19,000 to your brother, and $19,000 to a friend in the same year without filing IRS Form 709. If you are married, you and your spouse can combine your exclusions and jointly give up to $38,000 per recipient annually without any reporting requirements.

However, if the value of a gift to a single individual exceeds the annual limit, the giver must file IRS Form 709 to report it. This doesn’t necessarily mean gift tax will be owed. The excess simply counts toward your lifetime gift and estate tax exemption, which is $13.61 million as of 2024 (subject to inflation adjustments in 2025). In most cases, the giver is responsible for any gift tax owed. However, arrangements can be made for the recipient to pay the tax instead, though this requires special consent and planning.

It’s important to remember that while gifts are not taxable, any future income generated from those assets—such as interest, dividends, or rent—is considered taxable and must be reported. For example, if you’re gifted stocks that pay dividends, you’ll owe tax on those dividends, even though the original gift was tax-free.

Also, keep in mind:

• The annual exclusion applies per recipient, not as a total amount across all gifts.
• You can gift $10,000 to one person and $13,000 to another in the same year without filing a return, since each gift is below the limit.
• If you're married, you and your spouse may each gift $19,000, totaling $38,000 per recipient, without submitting a gift tax return.
• Gifts between spouses are generally unlimited and tax-free.
  Donations to qualified organizations are not considered gifts; they fall under charitable giving rules.
• Direct payments to cover someone's medical bills or tuition are exempt from gift tax, regardless of the amount.

As with any tax matter, especially when large sums or complex assets are involved, it’s wise to consult a qualified tax advisor. The rules around gifting can be nuanced, and professional guidance can help you avoid mistakes and make the most of current IRS allowances.

How Much Money Can Be Legally Given to a Family Member as a Gift?

The gift tax is a levy on significant gifts that prevents substantial wealth transfers from occurring without being taxed. It is not an income tax, but rather a transfer tax. 

For example, a single individual who donates several $15,000-or-less gifts to separate recipients for a year will not be subject to the tax on gifts to family and will not be required to submit a gift tax return. Furthermore, because the number of persons who can contribute more than this amount is restricted, only a small percentage of people must decide whether they need to submit a gift tax return.

However, it is crucial to learn what constitutes a gift. If you sell a residence for much less than the IRS considers its "fair market value," the difference is deemed a gift. 

Lifetime gifts also apply to your estate tax exemption. This means that any gifts exceeding the annual exclusion amount may reduce the tax-free amount you can transfer through your estate in the future. Currently, the IRS permits you to donate up to $13.61 million without paying gift tax during your lifetime, so most taxpayers will never have to pay gift tax.

So, let's assume you give your child $65,000 in 2021. This donation exceeds the yearly gift exclusion by $50,000. That implies you'll have to file a tax return with the IRS. Gifts to children and friends won’t be taxed right away. The IRS instead deducts $50,000 from your lifetime gift tax exemption. If you're unsure whether your gift to a family member is tax-free, consulting IRS guidelines or seeking expert advice from a financial advisor can clarify your obligations.

What to Consider When Gifting Money to Children

A detailed look at one's present financial circumstances may be the best place to start when deciding whether and how to go about gifting to children. 

An increasingly common trend of parents helping their adult offspring has evolved in our society. It might involve paying for mobile phone bills, higher education expenditures, first-time home down payments, and wedding expenses. Gifting money to family members is a generous way to support them during significant life milestones. However, full consideration should be given to how such gifts might affect the parent’s financial security. While supporting and donating money to adult children is customary, it might jeopardize a parent's retirement plans, especially if an unforeseen emergency or medical need arises.

Parents can give their adult children money in a variety of ways:

• A lump sum of money 
• Monetary installments
• Investments and assets
• Contributions to an IRA
• Contributions to a 529 education plan
• The establishment of a trust fund
• Death transfers

The optimal strategy for you and your family is determined by your financial status, children's situation, and dispositions.

Gift Tax Planning & Preparation Services

If you still have questions about gifting money to family members, you should speak with a tax professional. 

Since 1946, Porte Brown has offered tax and accounting services to Chicago and the surrounding areas, specializing in everything from standard tax solutions to functional expense and budget advice to multi-state nexus concerns.

Contact us today to learn how to protect your assets and your family’s future.