The end of the calendar year brings about many year-end financial tasks: satisfying that Required Minimum Distribution; paying real estate and property taxes; and giving to charities. Another, often overlooked, consideration is annual gifting. This falls in line perfectly with the holiday season.
While some people may feel a gift of money lacks creativity, there are several different perspectives to consider. For the person receiving the gift, it may be a welcome relief to pay down debts or to shore up their savings or, maybe, to start investing. For the person giving the gift, it may be a way to reduce your taxable estate and to see your loved ones enjoy the opportunities and memories this money can provide.
There are a few rules on gift limits to keep in mind. The IRA annual gift tax exclusion amount is $15,000 per person annually. By not exceeding the annual gift tax exclusion amount, that gift will not be taxable to the person receiving it, nor will the giver have to file a gift tax return. For a married couple, that means you and your spouse could each gift one person $15,000, or $30,000 in total. However, you will have to report a gift tax return in these instances of spouses “splitting” gifts, even though no taxable gift was given. Always consult with your accountant on any tax related questions.
Another type of gift to consider is a contribution to an individual 529 account. The same gift tax exclusion limits apply, but there is an additional 5-year “superfunding” rule. You are allowed to make 5 years’ worth of contributions in 1 year, so $75,000 at once, instead of $15,000 over 5 years. This uses up the gift tax exclusion for the person receiving the gift for a 5-year window but will reduce your taxable estate at the time the gift is given.
Finally, paying medical providers or educational institutions directly on the behalf of your loved ones for qualified medical or education expenses is another tax-free gift strategy. This tactic allows you to make unlimited payments and not affect your $15,000 gift tax exclusion to that individual. For example, if your granddaughter has a $40,000 tuition bill for law school, you could pay that bill in its entirety directly to the school and still give her $15,000 tax-free. It’s just another way to reduce your taxable estate.
Gifting to your family during your lifetime is a great strategy as long as you have enough money set aside for yourself. Things change, including tax laws, so talk to your tax advisor about your intentions. Our team at Hovis & Associates is here to guide you with investments and retirement planning to ultimately help you reach your financial goals.