Year-End Tax Planning
This is the fifth of our Year-End Tips for Tax Planning series. Every few weeks until the end of the year, we'll give you ways to keep more of what you've earned. Use them as building blocks in your financial planning
It’s always good to kill two birds with one stone. During the season of giving, you can (tax-wise) accomplish some effective giving as well.
The simplest and easiest method is often the best approach: Just give cash or property away to your loved ones. All you have to do is make gifts to family members that are covered by the annual gift tax exclusion. In many cases, you don’t even have to file a gift tax return.
Gifting assets can reduce the size of your taxable estate. In addition, the family may realize income tax savings in the future by having the income from the gifted assets taxed at a lower rate.
There is,however, a catch. You have to give up control over the gifted assets. No strings or conditions can be “tied” to this kind of gift.
Under the tax code’s annual gift tax exclusion, you can give gifts of cash or property to someone up to a specified amount without paying any federal gift tax. The annual exclusion, which is indexed for inflation in increments of $1,000, is $14,000 for 2015.
Although this may not seem like a lot, remember that a husband and wife can do joint gifts ($28,000 per year) to an unlimited number of children, grandchildren, etc.
Here’s how it works:
Bob and Mary have three adult children and seven grandchildren. They each give a holiday gift of $14,000 to each child and grandchild in 2015. In one season of giving, this client has reduced their joint estate by a total of $280,000 ($28,000 x 10 recipients).
Want to do more? A gift made directly to a financial institution to pay for tuition or to a health care provider to pay for medical expenses doesn’t count toward the gift tax exclusion. So you can pay a grandchild’s college tuition bill next semester in addition to giving the same grandchild $14,000 in 2015 and another $14,000 in January—all of it free of gift tax.
If you want to gift items that aren’t cash, some very favorable rules apply. You can read about them here.
He is also a founding Board Member and Finance Director of the Fayette Pregnancy Resource Center and serves on the Board of the National Equal Rights Institute.