No, jingle bells will not be ringing anytime soon, but if you’re fortunate enough to be in a position to give cash gifts to a friend or family member this year, you’ll want to know some tax basics of gift giving. And with tax season just wrapping up, we think gifting is a great topic to consider when mapping out your financial plan for 2015. Here are five questions that should be considered when giving a cash gift.
What are the annual and lifetime exemptions for cash gifts?
You’re allowed to give up to $14,000 per individual and $28,000 per married couple annually. Once you’ve exceeded the annual exclusion, there is a lifetime exemption of $5.43 million that applies to both the span of your life and your estate plan. Any gifts given during your life that exceed the lifetime limit can prompt a 40% tax on these gifts, or it can reduce the amount passed through your estate tax free.
Is there any tax advantage to gifting?
Depending on your financial situation this could be a great way to reduce estate taxes. Of course, you do need to make sure you leave yourself enough to live on after the gift is given.
How do I give to a minor?
Under the Uniform Transfer to Minors Act, or UTMA, you can give gifts to minors and either the giver or an appointed custodian manages the money until the minor becomes an adult. When the recipient turns 18 (or 21) they may take over management of the account. UTMAs also provide a layer of protection from tax consequences of the gifts themselves.
Can my gift be used for college savings?
Yes, 529 savings plans and most other college savings plans will accept gifts. A neat feature in the tax code with respect to 529 plans is that you can actually contribute up to five years’ worth of the annual limit all at once to the plan. So, in theory, you could contribute up to $70,000 in one year to a 529 plan. However, if you do so you won’t be eligible to contribute additional gifts to that plan for five years. If this is an option for you, it’s a great way to allow more money to grow for longer in the 529 plan. Additionally, if used for education, 529 plans generally allow for tax-free withdrawals.
Are there any non-taxable options for gift giving?
You can contribute to tuition, medical, or dental bills without impacting your annual or lifetime limit. However these payments must be made directly to the service providers. You cannot simply reimburse a friend or family member who had to pay tuition or a large medical bill.
photo by Ashraf Saleh
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