With the holiday season in full swing, most people begin to think about what’s on their loved one’s annual wish list. While the latest high tech gadget might be a great idea, have you ever thought about how far a monetary gift can go? A gift to the youngest generation in your family can help teach the importance of saving and self-discipline, ultimately leading to a lifetime of good habits and fiscal responsibility. For 20 & 30-somethings, a monetary gift can not only reinforce good habits, but can immediately ease the debt of those coming out of college, or help boost a loved one’s retirement account. And although we always assume that a gift exclusively helps the receiver, the tax benefits associated with these types of gifts can also be good for your wallet. As the “gifter” you can reduce your estate by giving to whomever you choose and if it’s to a registered non-profit charity, you could even be eligible for a tax deduction.
An individual can give up to $14,000, and a married couple as much as $28,000, to as many recipients as they’d like without any tax ramifications each year. These gifts can be made directly to the individual or put into an account in their name that they’ll benefit from in the future. Savings bonds, or deposits into custodial accounts or educational savings plans are very popular gifts for young children, ensuring that the gift is saved for a future purpose. For those 20 or 30-somethings, consider a gift into a traditional or Roth IRA. If you’re worried that your children will grow to expect these gifts instead of saving themselves, consider offering some type of match. One common strategy is to offer a retirement match, putting one dollar in an IRA for every dollar that the child puts toward their IRA or company 401k plan. For those paying student loans, another common strategy is to match dollar-for-dollar into a retirement account every dollar the child pays over the minimum monthly payment on their loans.
The holidays are also a time of year when people contribute more to charitable organizations close to their heart. If you own highly appreciated stock, this year consider gifting those shares instead of a cash gift. Let’s assume you bought a share of Apple for $20 that’s worth $100 today and that you’d like to use it to give to charity. If you were to sell this share yourself and then gift the proceeds, you’d pay capital gains taxes on the $80 of growth. If the charity is a tax-exempt non-profit, they don’t pay capital gains taxes. By gifting the share of Apple directly to the charity, you’re able to avoid the $80 taxable gain and also tax a deduction for the full $100 market value of the stock. If you’re growing your investment savings, write yourself a check for that tax-deduction and re-deposit the value back into your investment account. If you have required minimum distributions (RMDs) from your IRA, you can donate up to $100,000 of these assets each year to satisfy your required withdrawal and avoid paying ordinary income tax.
Many people only make plans in their will for gifts to their loved ones. As advisors, we see cases where a person with a large estate leaves gifts in their will that are below the annual gift exemption. When this happens, in addition to possible estate and generation-skipping taxes paid by the estate, certain states require the recipient to pay inheritance tax on the gift as well. By giving to your loved ones while you are alive you can reduce your estate and help avoid taxes, but more importantly, you get to see the recipient benefit from the gift. You also have the opportunity to warp your gift in a story, sharing your hopes and desires in giving the gift. Share with the next generation the importance of financial independence, why you enjoy giving to your favorite charity, or the biggest money mistake you made over the years.
Holiday gifts of cash can do a lot to help your loved ones, teach strong financial lessons and potentially lower future taxes. But, monetary gifting is most successful when it is about sharing your success and your values at the same time.