I’m often asked if someone could take an income tax deduction for money they give to their children. Unfortunately, gifts to individuals are not tax deductible. Tax deductions can only be taken for gifts to IRS-approved charities.
The IRS even limits the amount a child can receive from a parent before they must file a gift tax return. As of 2025, the maximum gift exclusion is $19,000 per child per parent. That means your child could get as much as $38,000 in tax-free gifts from both parents. But like I mentioned before, neither spouse can take a deduction for their gifts.
If you give your child more than the current annual maximum gift exclusion amount, you should complete Form 709, the “United States Gift (and Generation-Skipping Transfer) Tax Return.” This form supplements Form 1040 and is filed with your federal income tax return. Form 709 helps the IRS track your gift and charge it against your lifetime exclusion amount to calculate your federal taxable estate at death. Tell your tax preparer about any gifts you’ve made to individuals so they can determine whether to file Form 709 with your tax return.
However, there is a way to get a partial deduction for money that will eventually go to your children. You could set up a charitable lead annuity trust (CLAT) that first gifts cash to a charity and later passes assets to your child (or children).
Assets gifted to a CLAT are used to make annual payments to a charity of your choice for a specified term. At the end of the term, money remaining in the trust can potentially go to your child free of estate and gift taxes.
How does it work? Over time, a CLAT will distribute the entire principal—plus a minimum rate of return—to charity. The minimum rate of return is defined by the applicable federal rate (AFR), which the IRS publishes monthly. Your child will receive the growth of the trust that exceeds the AFR. The higher the rate of return, the more money goes to your child.
As the donor, you would receive a charitable deduction equal to the present value of the charitable payments based on the AFR. For example, say you put $1 million into a CLAT that makes annual charitable payments over 20 years. Assuming a hypothetical AFR of 2.76%, you would receive an immediate deduction of about $250,000. The charity would receive more than $1 million in payments during the term of the CLAT, and your child would receive the remaining principal. An average return of 7.5% would allow the trust principal to maintain the $1 million original value for your child.
There are, however, drawbacks to using a CLAT. Most notably, the income earned in the CLAT during the term is taxed to the donor. You should seek the counsel of an experienced financial adviser or estate planner to determine if a CLAT is appropriate for your goals.
Originally published June 2018
