The giving season is here, which makes it a good time to examine whether you should be giving financial gifts to family members now rather than later. If the answer is “yes,” then it is essential you examine the “how” and “why.”
The Bible says, “It is more blessed to give than to receive.” Still, if you can give and receive some benefits by using tax-advantaged strategies, your giving is all the better.
The holidays happen to coincide with the deadline for nearly all income tax deductions – midnight on December 31st for the calendar year for which you are paying income taxes. This can be confusing, since IRA contributions can be made up until the tax filing deadline, which is April 17, 2017. This is not the case for charitable contributions, financial gifts to family members or contributions to college savings (529) plans. If you decide to make those gifts, write and mail the checks or put the charges on a credit card before you sing Auld Lang Syne at midnight December 31st. Remember to document it for your tax preparer, or in case the IRS comes calling later with questions.
You can give up to $14,000 each to any number of persons in a single year without incurring a taxable gift ($28,000 for spouses “splitting” gifts). The lucky recipient often owes no taxes and is not required to report the gift unless it comes from a foreign source. You can also make unlimited payments directly to medical providers or educational institutions on behalf of others for qualified expenses without incurring a taxable gift.
Contributions to a 529 college savings account are considered gifts. Money in these accounts grows tax-free and can be withdrawn tax-free, provided it is used to pay expenses for college, a graduate school, or accredited vocational school.
Gifting of assets that have appreciated can also offer you savings on your income taxes. The IRS allows you to gift the assets at the purchase value rather than the appreciated value. Be aware that the recipient might face tax consequences, and those consequences should be part of the evaluation process. Be cautious and seek advice from your CPA and financial advisor before considering such transfers.
The IRS has a page of Frequently Asked Questions on laws pertaining to the gift tax here. The laws can be complex and you should consult your financial and tax advisors for clarity before using any of these strategies.
What better time is there to share your good fortune than during the time of year you spend with family and friends? In the same way that giving to charity expresses what is important to you, giving financial gifts to family around the holidays can reinforce relationships with family and friends. It says something in a very concrete way about how you think about them.
If you value education, gifting to a 529 college savings plan can reinforce that message to your loved ones. If one or more family members are going through serious, and likely expensive, medical challenges, a gift to help pay some of the costs could be a huge spiritual uplift at an emotional time. It reinforces your commitment to be there when they need you.
If you are fortunate enough to have the funds to give away now, consider whether family members who stand to inherit from you could make better use of some of the funds now rather than after you die. It can open conversations about your values and where you might like to see them spend the money.
Finally, you might want to be open to gifting “up” to parents in addition to gifting “down” to children. It might be your parents that need the financial support and if they are in a lower tax bracket than you, gifting “up” might make more sense from an income tax standpoint.
I hope each of you has a wonderful and blessed holiday period with your friends and family. This is a good time to remember that your financial planning is about more than dollars and cents. It should reflect your goals and the people and things that are important to you.
Erin Botsford – Botsford Financial Group
Securities offered through LPL Financial, Member FINRA/SIPC. Financial Planning offered through Lifestyle Planning Solutions, a registered investment advisor. Investment advice offered through Stratos Wealth Partners, a registered investment advisor. Botsford Financial Group, Lifestyle Planning Solutions and Stratos Wealth Partners are separate entities from LPL Financial.
For a list of states in which I am registered to do business, please visit www.botsfordfinancial.com.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for any individual.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.