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When it comes to helping your kids financially, most boomers face a tricky question: how do you transfer money without the IRS taking a huge cut?
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I talked with Lance Morgan, financial expert and founder of College Funding Secrets, to find out the smartest strategy. His answer centered on a specific dollar amount that caught me off guard: $19,000.
Here’s how it works. In 2025 and 2026, you can give any person up to $19,000 per year without triggering gift tax reporting requirements. That’s not $19,000 total — that’s $19,000 per person, per year. If you’re married, you and your spouse can each give $19,000 to the same person, effectively doubling the amount to $38,000. However, Morgan did caution you to be careful about the source of those funds.
“The $19,000 gift is tax-free to the recipient,” he said, “but if you take the money out of an IRA, you are still going to pay Uncle Sam his portion of the money, since he is your partner. However, if you have money that has already been taxed, it is a great way to give your kids, grandkids or anyone else, $19,000 without them needing to pay income tax on that money.”
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The annual gift tax exclusion is powerful because it’s per person and resets every calendar year. Let’s say you have two kids and four grandkids. As a married couple, you could gift $228,000 in a single year completely tax-free: $38,000 to each of your two children, $38,000 to each of their spouses and $38,000 to each grandchild.
The recipients don’t owe any income tax on the money, and you don’t have to file a gift tax return as long as you stay at or under the $19,000 threshold per person.
Morgan’s bigger point was about where the money comes from. Most boomers have saved for retirement in 401(k) plans or IRAs, and here’s where things get complicated.
“Transferring wealth from one generation to the next without the IRS inheriting more than your kids is always a challenge,” Morgan said. “Most families have saved for retirement into a company 401(k) plan or other qualified retirement account and the IRS is their biggest partner. Not only does the IRS get a percentage of your retirement income, when you die, your IRA money also gets added to your income in the year of your death, which could put you in the highest tax bracket.”
The issue is that traditional IRA and 401(k) money has never been taxed. When beneficiaries inherit these accounts, they typically must empty them within 10 years and pay ordinary income tax on every dollar withdrawn. If your kids inherit a large IRA and have to take big distributions, those withdrawals could push them into higher tax brackets, meaning they lose a significant chunk to taxes.
This is where Morgan’s $19,000 annual gifting strategy shines. If you have money in taxable accounts — money you’ve already paid taxes on, such as a Roth IRA — you can give that away tax-free up to the annual exclusion. Your kids get the full amount without owing any income tax.
“Using real estate, life insurance and a few other strategies allows you to pass money to the next generation tax-free,” Morgan noted.
The key is planning ahead. Instead of letting massive retirement accounts pile up only to get hammered by taxes when your heirs inherit them, you can strategically gift smaller amounts each year from already-taxed sources.
Even if you give more than $19,000 to someone in a single year, you probably won’t owe gift tax. That’s because there’s a lifetime exemption of $13.99 million per person in 2025, rising to $15 million in 2026 for givers filing as single, or $30 million for married couples.
If you exceed the annual $19,000 limit, you just need to file IRS Form 709 to report it, and the excess counts against your lifetime exemption. For most families, this means you can transfer significant wealth without ever actually paying gift tax, you’re just using up your exemption.
Morgan mentioned a few other approaches beyond the annual exclusion:
You can pay unlimited amounts directly to educational institutions for tuition without it counting as a gift at all. Same goes for medical expenses paid directly to healthcare providers. These payments don’t reduce your $19,000 annual exclusion or your lifetime exemption.
Life insurance is another tool Morgan highlighted. When structured properly, life insurance death benefits pass to beneficiaries income-tax-free, and can be arranged to avoid estate taxes as well.
The $19,000 annual gift tax exclusion gives boomers a straightforward way to help their kids financially without triggering tax headaches for anyone. The key is using money that’s already been taxed rather than pulling from retirement accounts where the IRS is still waiting for its cut.
As Morgan said, wealth transfer is all about minimizing what the IRS inherits. By gifting strategically during your lifetime from the right sources, you can ensure more of your money ends up with your family rather than the government.
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This article originally appeared on GOBankingRates.com: Financial Expert: Here’s the Smartest Way Boomers Can Give Kids Tax-Free Money