Gifting Money to Your Children: What Pennsylvania Parents Should Know

Very little beats the joy you feel when a loved one receives the gift from you. You know the one. It is the gift they have only dared to whisper about in secret to the stars. And the gift you likely worked very hard to afford so you could experience secondhand their joy when you gave it to them.

Whether helping with the purchase of a first home, gifting a home altogether, paying for a grandchild’s education, or simply sharing accumulated wealth, lifetime gifting can be immensely rewarding. But for some, it can also have major tax consequences if not done carefully.

So, how much can you give to your children without paying taxes? The answer requires understanding what qualifies as a “gift” for tax purposes and the basics of federal gift and estate tax and Pennsylvania inheritance tax.

What Is Considered a Gift?

Generally, a gift occurs when you transfer property and receive less than its full value in return. The amount of the gift is the difference between the value transferred and the value received in exchange. 26 U.S.C. § 2512(b).

For example, if you sell a $100,000 asset to your child for only $25,000, the $75,000 difference may be treated as a gift for federal gift tax purposes. That said, just because a gift is considered “taxable” does not necessarily mean tax will actually be owed.

How the Federal Gift Tax Works

Federal law imposes a gift tax on certain transfers made during a person’s lifetime and an estate tax on the transfer of a person’s taxable estate at death. 26 U.S.C. § 2501(a)(1); 26 U.S.C. § 2001(a).

For 2026, the annual gift tax exclusion generally allows a donor to give up to $19,000 to a person, provided the gift qualifies for the annual exclusion, without the gift using any of the donor’s federal lifetime and estate tax exemption (more on what that is later). 26 U.S.C. § 2503(b); Rev. Proc. 2025-32, § 4.42(1). A mother with three children, for example, could give $19,000 to each child (a total of $57,000) without those gifts counting against her lifetime federal gift and estate tax exemption.

Each spouse has a separate annual exclusion, meaning a married couple can generally give up to $38,000 per recipient in 2026 using their combined annual exclusions.

Importantly, $19,000 is not a limit on how much you may give. If a gift exceeds the available annual exclusion, the excess generally constitutes a taxable gift and may use a portion of the donor’s lifetime gift and estate tax exemption.

For 2026, that federal lifetime and estate exemption is $15 million. 26 U.S.C. § 2010(c)(3). Unlike the annual exclusion, it is not $15 million per recipient, but rather the total value of transferred property during lifetime and post-mortem, cumulatively.

For example, suppose a mother gives her child $1,019,000 in 2026. Assume the federal annual exclusion applies. The first $19,000 is excluded and the remaining $1 million is considered a taxable gift. She generally would not owe gift tax because the $1 million would be within the $15 million federal lifetime exemption, leaving approximately $14 million of the exemption available.

Now suppose the mother later dies with a $16 million taxable estate. Because she already used $1 million of her lifetime exemption, only approximately $14 million of her $16 million estate can be sheltered from federal estate tax. In this simplified example, the remaining $2 million could therefore be subject to federal estate tax. 26 U.S.C. §§ 2001, 2010.

Special Exceptions for Tuition and Medical Expenses

Qualifying tuition paid directly to an educational institution and qualifying medical expenses paid directly to the medical provider on another person’s behalf are excluded from taxable gifts. 26 U.S.C. § 2503(e).

The word “directly” is important. Giving your child $30,000 to pay tuition is not treated the same as paying $30,000 of qualifying tuition directly to the school. Because this exclusion operates separately from the annual exclusion, a grandparent could potentially pay a grandchild’s qualifying tuition directly to the university and also make a qualifying $19,000 annual-exclusion gift to that grandchild in the same year.

Should You Give During Your Lifetime or Leave an Inheritance?

For wealthier individuals who may ultimately be subject to federal estate tax, gifting property during life can have a tax advantage because the value of a gift is generally determined when it is made. 26 U.S.C. § 2512(a). If a parent gives a child property worth $1 million that later grows in value to $2 million, the gift generally uses $1 million of the parent’s lifetime exemption. The additional $1 million in growth occurs in the child’s hands and generally does not use more of the parent’s exemption.

However, there can be a downside when gifting an appreciating asset during your lifetime.

When a parent gives property to a child during life, the child generally receives the parent’s “basis” in the property, which, in simple terms, is usually what the parent originally paid for it. 26 U.S.C. § 1015(a). Suppose a mother buys stock for $50,000 and later gives it to her child when it is worth $200,000. If the child immediately sells the stock for $200,000, the child generally has a $150,000 capital gain, which will then be taxed.

The result can be very different if the child inherits the stock. Inherited property generally receives a new tax basis equal to its fair market value at the parent’s death. 26 U.S.C. § 1014(a). If the stock is worth $200,000 when the parent dies and the child immediately sells it for $200,000, there generally would be no capital gain, and therefore no capital gain tax owed.

Thus, giving an appreciating asset earlier may preserve more of the parent’s lifetime exemption. But keeping an appreciated asset until death may save the child capital gains taxes. The best approach depends on the particular asset and the family’s circumstances.

Pennsylvania Inheritance Tax

Pennsylvania does not impose a separate lifetime gift tax in addition to the federal lifetime gift tax. However, much like federal estate tax, it does impose an inheritance tax on property that is transferred after death.

The Pennsylvania Inheritance Tax law is important when concerning gifts made shortly before death. Pennsylvania’s Inheritance tax applies to any gift made within one year before the donor’s death, with a $3,000 exclusion per recipient, per year. 72 P.S. § 9107(c)(3).

For example, if a Pennsylvania resident gifts a child $100,000 and dies within one year, $97,000 may be subject to Pennsylvania inheritance tax.

Just as Pennsylvania’s inheritance tax is separate and apart from the federal estate tax, the federal $19,000 annual gift tax exclusion and Pennsylvania’s $3,000 inheritance-tax exclusion should not be confused. They are separate rules under separate tax systems.

There is no single gifting strategy appropriate for every family. The right approach depends on the assets involved, the donor’s financial needs, the circumstances of the recipients, and the potential tax consequences. Thoughtful planning can allow parents and grandparents to experience the joy of helping their loved ones today while minimizing unintended tax consequences tomorrow.