What is it?
A gift is a voluntary transfer of money or property from one person to another person or entity(such as a trust) where the person making the gift receives either nothing or a lesser amount ofmoney or property in return. In the context of education planning, gifting is usually implementedas a strategy when parents want to shift income to their child and reduce taxes. This ability toshift income and reduce taxes works best when the parents are in a high tax bracket and the childis in a low tax bracket.
The kiddie tax rules may make gifting to children less effective as a college savingsstrategy.
Strengths
Shifts income to lower tax bracket
The primary advantage of gifting assets to your child is that, in most cases, children are in a lowertax bracket than their parents. So over time, the money will likely grow to be worth more in thechild’s account because the child generally pays income and/or capital gains tax at a lower rate.However, the kiddie tax rules may negate this advantage when the child’s annual unearnedincome is below a certain amount, as discussed below.
Child retains parents’ cost basis in gifted asset
When you gift an asset to your child that has appreciated in value, such as appreciated stock,your child’s basis (cost) in that asset is considered to be the same as your original cost, not thecurrent value of the property. This means that upon sale of the asset, your child will have thesame amount of capital gain that you would have had. The difference is that your child may oweless capital gains taxes if he or she is in a lower tax bracket.
Capital gains tax rates are lower for lower-income individuals
Individuals with little to no taxable income generally pay zero capital gains tax on most long-termcapital gains. If you gift appreciated assets to your child, your child will have the same basis andholding period in the assets that you had. If you are in a higher income tax bracket than yourchild, then your child will have some tax savings when the asset is sold compared to if you hadsold the asset.
Reduces size of gross estate
When you gift assets to your child, you generally remove those assets from your gross estate.Thus, you reduce the chance your estate will owe estate tax.
Tradeoffs
The kiddie tax may limit your tax savings
Earnings, interest, and capital gains earned by your child are taxed to your child each year underspecial “kiddie tax” rules that apply when a child has unearned (passive) income. Under thekiddie tax rules, a child’s unearned income over a certain threshold ($2,700 in 2025) is taxed atparent income tax rates. The kiddie tax rules generally apply to children under age 18 and full-time college students under age 24 whose earned income doesn’t exceed one-half of theirsupport.
To minimize the impact of the kiddie tax, parents might consider investing their child’ssavings in tax-free or tax-deferred investments so that any taxable income is postponed until afterthe child reaches age 24 (when the child is taxed at his or her own rate). Such investments caninclude U.S. savings bonds, tax-free municipal bonds, or growth stocks (which provide little, ifany, current income). Alternatively, parents can try to hold just enough assets in their child’s nameso that the investment income remains under $2,700.
Transferring assets to child may reduce his or her financial aid award
Under the federal methodology for determining a family’s financial need, a child’s assets can havea greater financial aid impact than his or her parents. Under this formula, a child is expected tocontribute 20 percent of his or her assets each year toward college costs, compared to 5.6percent for parents. So $20,000 in a child’s bank account would translate into a $4,000 expectedcontribution, whereas the same money in the parents’ account would mean a $1,120 expectedcontribution.
Gifting assets to your child is irrevocable
Once you gift an asset to your child, your child owns it. That means that your child can use themoney for anything, not necessarily college.
Possible gift tax implications
If the sum of the gifts you make to your child each year is equal to or less than the $19,000 (in2025) annual gift tax exclusion or double that amount for married couples who are U.S. citizensand making joint gifts, the gifts are not subject to federal gift tax (though they may be subject tostate gift tax). However, if gifts to your child are over the annual gift tax exclusion amount in agiven year, a portion of the gifts may be subject to federal gift tax.
What are the most favorable types of property to gift to your child?
There’s no restriction on the type of property that can be gifted to your child; parents are free togift any asset they wish. However, some types of assets are more favorable to gift than othersdue to the tax-saving opportunities. Two of these assets are discussed here: appreciated assetsand income-producing property.
Appreciated assets
An appreciated asset is an asset that has a value in excess of the holder’s adjusted tax basis inthe asset. Though everyone certainly hopes their assets will appreciate in value, the downside isthe capital gains taxes that could result from the sale of such assets.
The strength of gifting an appreciated asset to your child is that if and when your child sells theasset, he or she will be subject to tax on any gains at his or her own rate.
Income-producing property
Income-producing property is just what the name suggests–it’s property that produces income.Examples of such property include rental property, stocks that pay regular dividends, bonds thatpay interest, and equipment leases. The strength of gifting income-producing property to yourchild is that, in most cases, you transfer the income stream to someone in a lower tax bracketthan yourself.
Questions & Answers
Is it true that a person can make a tax-free gift of tuition on behalf of a child?
Yes. A tax-free gifts of tuition is a payment of tuition made directly to a college or university onbehalf of a student for his or her education. The IRS won’t consider this type of payment to be agift for purposes of computing federal gift tax. In other words, you can make a gift of tuition formore than the annual gift tax exclusion in a given year, without federal gift tax consequences.
To qualify, the payment must be for tuition only and made directly to the college. You can’t gift themoney to the child and then instruct the child to apply the money toward tuition. The gift of tuitionmust occur at the time your child is actually in college.
Prepared by Broadridge Advisor Solutions. © 2025 Broadridge Financial Services, Inc.
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