The giving season is here, making it an excellent time to examine whether you should give financial gifts to family members now rather than later. If the answer is “yes,” then it is essential you examine the “how” and “why.”
If you can give and receive some benefits by using tax-advantaged strategies, your giving is all the better.
Reason #1 – The Deadline
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 – 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 on December 31st. Remember to document it for your tax preparer or in case the IRS comes calling later with questions.
Reason #2 – Possible Savings on Taxes
You can give up to $16,000 each to any number of persons in a single year without incurring a taxable gift ($32,000 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 Money in these accounts grows tax-free and can be withdrawn tax-free, provided it is used to pay expenses for college, graduate school, an accredited vocational school, and K-12 school (up to $10,000/year).
Gifting 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.
Reason #3 – It’s A Way to Express Yourself During an Important Family Time
The holiday season often brings family and close friends together. In the midst of connecting with loved ones while watching football, eating delicious food, and opening presents, there exists an opportunity to further pour into these important relationships through the giving of financial gifts. This can be a way to go above and beyond in showing your loved ones that you care.
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 plan on passing funds to loved ones in your will or estate upon your death, consider whether those who would receive the inheritance could make better use of some of the funds now rather than after you’ve passed. This 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. Also, if you gift appreciating assets “up” and your parents pass, you will receive a step-up in basis if the assets pass back to you.
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.
Securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Merit Financial Group, LLC, an SEC-registered investment adviser. Merit Financial Group, LLC and Merit Financial Advisors are separate entities from LPL Financial.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.