Many families make gifting an important part of their financial life, by giving charitably to causes they believe in or giving to kids, friends, or families, who don’t qualify as charities. There are a lot of misconceptions about gifting and how to gift money to an individual. In this article, we’ll go over three ways you can gift money to friends and family tax-free.
Three Ways to Gift Tax-Free
When it comes to gifting, there are lots of misconceptions about how much you can give and who you can gift to without paying taxes. When it comes to friends and family, many people believe there is no way to give tax-free. However, the gifting laws in the United States are quite broad. In fact, there are two qualified ways you can gift to friends or family tax-free. The first is through qualified education expenses, and the second is through qualified medical expenses.
Starting with qualified education expenses, if you’re going to help friends, family, or kids through college, the qualified expenses include tuition, books, lodging, and more. When you gift to cover those qualified education expenses, your gift is tax-free and will not count against your lifetime exemption limit. If you want to help a friend or family pay for medical expenses, you can gift towards that tax-free as well, as long as the amount is great enough that it would have been deductible on your Schedule A. That will not count against your lifetime exemption limit either.
Many families like to give annually to help their kids. Many people feel like they are tied to the annual gifting limit, which is $18,000 in 2024. For example, if you have three kids you want to give the maximum to, you could send $54,000 ($18,000 to each) tax-free, without impacting your lifetime exemption limit.
Explaining the Lifetime Exemption Limit
Your lifetime exemption limit is the maximum amount you can give to your heirs tax-free. In 2024, that limit is $13,610,000 per person. That means, if you’re married, as a couple you can gift double that amount ($25-26 million) to heirs without incurring estate tax. Estate tax is additional tax on anything over the $13.6 million limit. For this reason, most people aren’t concerned about estate tax, since your net worth has to be substantial for it to be considered. As we approach 2026, if legislation doesn’t change, we expect the lifetime exemption limit to revert back to $6-7 million per person (meaning $12 – 13 million per couple).
We bring this up because it will impact how you think about gifting money to friends and families. For example, if you have $1 million in your checking account and you want to give $100,000 to a child or friend, you could gift that amount without incurring tax. However, since $100,000 is more than the $18,000 annual gifting limit, that $100,000 would count towards your lifetime exemption limit. That means, if you want to gift larger amounts of money, perhaps to help a child buy a car or house, you can gift more than the $18,000 annual limit. You’ll just need to make sure that it’s captured on your tax return and reported as going towards your lifetime exemption limit.
That is a big misconception. Many people want to give more, but believe they can’t give above that $18,000 limit. However, this isn’t true. In many cases, it can make sense to give along the way if you have lots of wealth. There are a number of reasons for that, depending on your net worth and the type of funds you have access to. For example, if you have most of your wealth in IRAs, you can’t just gift IRA money to a child without incurring taxes on you. However, if you leave an IRA or 401k to a child, it is taxable income to them when they take it out. With so many different rules, it’s no wonder there are so many misconceptions around gifting rules. However, if you follow the strategies outlined above, you can gift wisely and generously, should you choose to do so.
Making Gifting a Part of Your Retirement Planning
When you think about gifting, you need to make sure it fits into your overall retirement plan. Even if the amount feels small, imagine $500 a month or so, it can make a significant impact on your retirement success and portfolio. For this reason, your gifting plan needs to be in sync with your income and tax planning in retirement. At REAP Financial, we help families plan their gifting alongside other important aspects of retirement planning. If you have charitable intent or you plan to gift money through the years, you should get a free copy of our free tax guide, Tax Strategies for Retirement: Buckets Create Tax Choices. Just send an email to retire@reapfinancial.com requesting your copy, and our REAP financial team will send it over to you!
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