529 Plans

How Much Can I Gift My Child Tax-Free?

Gifting your child $16,000 to sit in a bank account won’t necessarily contribute much to their future.

October 25, 2022
Sootchy Team
How Much Can I Gift My Child Tax-Free?

How to Go About Gifting Money for Your Child’s Future

Parents might be shocked to learn that they can’t gift their children limitless money in any given year without potentially paying taxes or filing a lifetime gift tax exclusion form. Filing this tax form will eliminate the tax consequences of gifting above the annual threshold. If you’re gifting your child money to put towards their future, there may be another way to go about it. But first, how much can you gift your child without needing to file for a lifetime gift tax exclusion?

Each year, each person is allowed to gift another person up to $16,000 (2022), which could be $32,000 a year per child from both parents, without having to pay taxes or file a lifetime gift tax exclusion form. Any additional monetary gifts on an annual basis will either require taxes be paid on the amount above $16,000 or a lifetime gift tax exclusion filing is used. The lifetime giving threshold for each person is $12,060,000 (2022). Unless your estate is or expected to be above this number in the near future, the lifetime gift tax exclusion filing is what most parents will use to eliminate a tax consequence for that year. On the other hand, if your estate is above this threshold, depending on the tax consequences, it may be worth paying taxes today to keep a higher exemption when you pass. Note, the lifetime gift tax exclusion level is expected to drop in 2026 to about half the current level unless extended by congress.

Another great benefit of using 529 college savings plans is the potential tax deduction you can receive. While not applicable on the federal level, some states offer a tax deduction for some or all of the contribution amount that you put into the plan. So, not only are you helping your child, but you could also be helping yourself lower your state tax bill.

Of course, simply gifting your child money isn’t always wise. Unless it’s placed in an investment account, like a 529 college savings plan, your gifted money won’t have much of a chance to grow. However, placing monetary gifts into an account that may allow it to increase over time can help pay for your child’s future.

At Sootchy, we’re dedicated to helping parents afford college tuition by offering a 529 college savings plan. To start saving and investing in your child’s future, download Sootchy’s app from the iOS App Store or Google Play Store today.

I Want to Use Gifting for My Child - How Should I Think About It?

Gifting your child a substantial amount of money isn’t always necessary unless you are adding to their college fund. Using the threshold of $16,000 from above, and adding that each year to a 529 college savings plan for a child can quickly increase the value of the account over time, especially if taking into consideration potential growth. But, if that is not affordable, anything given can be used to benefit your child’s future.

Gifting your child $16,000 to sit in a bank account won’t necessarily contribute as much to their future. Many parents decide to add to their children’s college funds from the moment they’re born. The method that you use is important, though. Simply gifting funds to your child over the years means little unless that money grows alongside them. Seeking help from a trusted source like Sootchy for 529 college savings plans, can help parents provide for their children. These plans allow parents to save and invest their money over the years. Opening a 529 college savings plan can allow you to spend less while contributing more to your child’s future.

Simply gifting your children money without investing it in any way can cause you to spend too much without potentially gaining any earnings. Alternatively, you can start a 529 college savings plan. This method allows parents to start saving when their children are young and contribute money over time. As the years go on, you can accumulate more earnings in a 529 college savings plan, especially through compounding growth, allowing your child to pursue higher education while focusing on eliminating financial difficulty.

529 College Savings Plan Details

A 529 college savings plan is a great way for parents to start saving for their children’s education without having to spend too much upfront. Parents can open a 529 college savings plan in virtually any state. These plans are state-sponsored savings and investment opportunities for parents who want to contribute to their children’s secondary education goals. Because of the nature of 529 college savings plans, there’s more leeway for parents who want to give their children tax-free monetary gifts more focused on education and have the opportunity to grow.

Although contributions to 529 college savings plans are subject to the same rules as any other monetary gift, there’s an important bonus: the gifts can grow. You can find the right plan for your family by working with experienced professionals, like those at Sootchy. Once you do, you can start contributing money that will benefit your child’s future.

When you invest money in a 529 plan, whether $5 or $5,000, it has the potential to grow over time. By the time your child is ready to attend college, you may have saved and accrued enough funds to fully cover the cost of tuition. The money earned from these plans is tax-free, provided it’s used to fund your child’s higher educational pursuits. Not only can the funds be used for college, but also for K-12 tuition, and some other education programs.

Why Should You Use a 529 College Savings Plan When Gifting Your Child Money?

As mentioned before, 529 college savings plans allow parents to invest in their children’s futures from day one. But, not all parents are financially capable of gifting their children $16,000 each year, especially for families with more than one child. That’s why working with the professionals at Sootchy for 529 college savings plans is beneficial. Young parents and long-time parents alike can begin saving and investing now.

Gifting your child money doesn’t necessarily benefit them when it comes time to pay for education expenses. FASFA, the application to receive Federal Financial Aid, takes into consideration the finances of both the parents and the children. If your child has $16,000, or more, in a bank account from monetary gifts, it could prevent them from receiving adequate financial aid. Whereas, using some or all of a child’s monetary gifts in a 529 college savings plan significantly reduces the money’s effect on receiving aid via the FAFSA application. As such, there can be two sources to cover education expenses. More potential aid can be received by the child in addition to having a 529 college savings plan.  

Unlike other investment plans, there are few eligibility requirements to open a 529 college savings plan. No matter your financial circumstances, you can start a 529 college savings plan to support your child in their efforts to attend a higher education institution. Not only that, the funds earned and saved in a 529 college savings plan are both tax-deferred (meaning gains compound each year instead of taxes being paid on them) and tax-free when taken out of the plan so long as the funds accrued in your plan are used to pay for higher education costs. So, not only can you contribute a substantial amount of money annually to your child’s future, but that money will not be taxed upon use or during its growth.

Giving your child the gift of tax-deferred and tax-free education funds is something every parent wants. By downloading the Sootchy app you can start investing and accruing funds in a 529 college savings plan today.

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