Gifting Money

By Michelle Brennan, RP®

Internal Revenue Service (IRS) rules for 2016 currently allow gifts of cash and securities up to $14,000 each to any number of individuals per year without gift-tax implications. Even though you may not choose to give to that level, giving money to children can impart lessons about the importance of saving and the benefits of long-term financial planning, plus it can teach them about charitable giving. It can also help young people develop fiscal responsibility, while giving them the independence to make financial decisions.

At the same time, the tax benefits associated with some financial gifts - to young people as well as to other family members and loved ones, or even to a charity - can help the giver reduce his or her tax bill. Below are some ideas on how you can gift.

Make contributions to a child's Roth individual retirement account (IRA), up to a total of $5,500 per account per year. The child must have earned income at least equal to the amount put into the account each year. So, if you child has taxable compensation of $2,000 for the year that's the maximum amount that can be contributed. Like a traditional IRA, a Roth investment grows tax-free. The advantage of the Roth, is that the account owner can withdraw contributions tax and penalty-free at any time. The owner may have to pay taxes and penalties on earnings if they make a withdrawal before age 59½. Keep in mind, contributions to a Roth IRA are not tax deductible.

Transfer money to the younger generation through a 529 college-savings plan for a longer-lasting gift. Contributions to a 529 plan must be used for post secondary education and cannot exceed the amount necessary to provide for the qualified education expenses of the beneficiary. If you contribute to a 529 plan, however, be aware that there may be gift tax consequences if your contributions, plus any other gifts, to a particular beneficiary exceed $14,000 during the year.

Pay a student's tuition bill directly, rather than giving money to the student or making a deposit into a 529 account where they are the beneficiary. By paying the school directly, you may qualify for certain tax credits and deductions. In addition, the money you pay for education should not apply to the $14,000 annual limit on gifts. You should discuss the tax implications specific to your situation with a qualified tax professional prior to executing this.

Give securities (stocks or bonds) to a charity, using securities which have appreciated significantly in value from when you first purchased them. You can take an income tax deduction for the value of the securities and the charity won't be subject to capital-gains taxes when the securities are sold.
Help a loved one support a charity, either by giving on their behalf directly to a charity they support or by making contributions to a donor-advised fund. As the donor, you can take a tax deduction, and - if the contribution is to a donor-advised fund - the money could grow tax-free until a charity is designated to receive the funds.

Open a custodial bank or brokerage account on behalf of a child, funded with either cash or securities. Any adult can manage the account and anyone can add money to it. It's important to point out, however, that a custodial account is considered a child's asset for purposes of calculating college financial aid, so it can impact potential awards. Upon the child reaching age of majority (age 18 or 21) it will solely become their account.

Before giving a financial gift, talk with your financial advisor and a tax professional to make certain there are not unexpected consequences to your situation.

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