Any time one person gives something of value to another without the expectation of equally valuable compensation, including a contribution to a 529 plan, that exchange is considered a gift for tax purposes and may incur the federal gift tax. Up to a certain limit – which changes every few years to adjust for inflation – anyone can gift assets to another without having to pay the tax, but values exceeding the federal limit (which is $15,000 in 2021) may force the giver to file a gift tax return with the IRS and possibly pay a portion of the gift in taxes.

However, there’s an important caveat that makes the gift tax a moot point for many families: the lifetime gift tax exemption. Each taxpayer is allowed to exceed the gift tax exemption by a total of more than $11 million over the course of their lifetime, and it’s only after that exemption has been exceeded that the taxpayer must make an actual payment to the IRS.