When it comes to transferring wealth to your children or grandchildren, understanding the IRS gift tax is key to keeping more of your money in the family and away from taxes. Let’s dive into the details of gifting and the potential tax implications, focusing on someone like yourself who may be considering passing down substantial assets.

How Much Can I Give My Kids Before Paying IRS Gift Tax?

Understanding the Gift Tax Basics

First, let’s clarify what the IRS gift tax is. The gift tax is a federal tax imposed on the transfer of money or property from one person to another while receiving nothing (or less than full value) in return. 

The good news? You won’t have to pay gift taxes unless you exceed certain limits. The IRS allows you to gift up to $19,000 per recipient in 2025 without triggering the gift tax. 

This is known as the annual gift tax exclusion. If you’re planning to give to multiple family members, you can give each person up to this limit, which can significantly help in wealth transfer strategies.

As a CFP(R) professional working with clients like you, I’ve found that people often underestimate how much they can give tax-free. Many think they’ll owe the IRS on any large gifts when that isn’t the case as long as you plan correctly.

How to exceed the IRS gift tax, and owe no taxes on the gifts

The IRS allows the giving (gifting), directly to a health or education institution without required gift tax to be paid. So what does this mean?

You are able to pay for education expenses directly to the school, college, and/or university for any amount and you will not be required to pay gift tax. The same goes for expenses paid directly to the health care institutions like hospitals or medical facilities. 

In these cases you will not be required to pay gift tax and this gift provides the responsible person with relief of having to pay the expense directly themselves. 

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How Much Can I Give in My Lifetime?

The lifetime estate and gift tax exemption is where things get really interesting for high-net-worth individuals. In 2025, the lifetime exemption is set at over $13.99 million. This means that even if you exceed the annual $19,000 per person limit, you won’t have to pay taxes on gifts until your total lifetime gifts go over this threshold.

Consider this: You’re looking to help your child buy a house and gift them $100,000. Since that’s above the $19,000 annual exclusion, you’ll dip into your lifetime exemption, reducing it slightly. But you still won’t owe taxes on the gift unless you’ve given away more than $13.99 million in total.

Keep in mind that you are still required to file a gift tax return, Form 709 for the proper tracking of this gift, and other property transferred during the transferor’s lifetime. 

This exemption is a game changer for estate planning, especially if you’re looking to reduce your taxable estate and potentially save your heirs from estate taxes later.

For more on preparing for these major financial decisions, check out our insight on the Important Tax and Financial Numbers for 2025.

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Do My Kids Have to Pay Taxes on Gifts?

A question I often hear from clients is, “Do my kids have to pay taxes on these gifts?” The answer, in most cases, is no. 

The recipient of the gift, also known as the donee, does not pay any taxes on the gift itself. They won’t need to report it on their tax return or worry about any IRS filings.

This can be a major relief if you’re planning to help your child with college tuition, fund a new business venture, or simply pass along a portion of your wealth. Knowing that the recipient won’t face a tax burden allows you to focus on how best to structure the gift for your financial plan.

Learn more about common tax pitfalls in our insight on 5 Issues to Consider Before You File Your 2024 Tax Return as a Retiree.

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What About State Gift Taxes?

While the federal government handles the bulk of gift tax regulations, it’s important to consider whether your state has additional taxes. Most states don’t impose a state gift tax, but a few do. 

If you live in a state like Connecticut, which is one of the few that taxes gifts, you’ll want to understand how state regulations impact your overall gifting strategy. At the time of writing (February 2025), Connecticut has a 12% state gift tax on the amount over the annual exclusion ($19,000 in 2025).

For example, Connecticut state tax payers that gifted their child $20,000 would have to pay $120 in state gift tax.

• $20,000 – Gift to Child
• $19,000 – Federal annual exclusion
• $1,0000 – excess over the annual exclusion
• 12% of the excess amount = $120 of state tax due in Connecticut 

More information can be found here: Connecticut Estate and Gift Tax Information

As always, it’s essential to work with a financial planner who is familiar with your state’s rules and can integrate these into your broader estate plan.

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How Gifting Can Affect Medicare and Medicaid Eligibility

Gifting isn’t only about transferring wealth while minimizing taxes. There are other considerations, such as how gifts might affect future eligibility for programs like Medicaid.

If you or a spouse plans to apply for Medicaid to cover medical care expenses, the IRS imposes a five-year look-back rule. This means any significant gifts made within five years of applying for Medicaid could disqualify you from receiving benefits or delay your eligibility.

This is particularly important for high-net-worth individuals planning for long-term care. While gifting large sums to family members may seem like a good idea to lower your taxable estate, it could backfire if you need to rely on Medicaid. 

Learn more about protecting your wealth in our insight on Inflation Strategies for Financial Resilience.

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Using Gifting to Reduce Estate Taxes

If you’re concerned about estate taxes, gifting is one of the best tools in your arsenal. The current federal estate tax lifetime exemption sits at over $13.99 million, but any wealth above that threshold is taxed at 40%. 

By gifting assets during your lifetime, you can reduce the size of your taxable estate. For example, if your estate is worth $20 million and you give $8 million to charities, education expenses, and/or medical facilities, your estate tax exposure will decrease. 

The combination of the annual exclusion and the lifetime exemption makes gifting a powerful strategy for high-net-worth individuals.

For advanced strategies on protecting your wealth, I encourage you to read Maximizing Your After-Tax Returns: Advanced Strategies for High Earners.

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What’s Next, Final Thoughts on Gifting and IRS Gift Tax

Gifting to your kids can be an incredible tool for passing on wealth, reducing the size of your taxable estate, and helping family members without incurring heavy taxes. But it’s critical to have a plan in place to avoid unnecessary tax exposure and potential complications with Medicaid or state gift taxes.

If you’re unsure how to make the most of the IRS gift tax rules, working with a Certified Financial Planner like me can help you develop a strategy tailored to your financial situation.

For more insights on financial planning, taxes, and wealth management, visit the Insights section of our website, or check out our insight on 7 Steps to Evaluate Your Lump Sum Pension Options.