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Your Guide to Monetary Gifting this Holiday Season

Sacks and AssociatesTax Planning Wealth ManagementYour Guide to Monetary Gifting this Holiday Season

Your Guide to Monetary Gifting this Holiday Season

With the holiday season officially upon us, many of you are probably looking for a gift that could make a difference for a loved one or wondering what you can do to help your community. A monetary gift is a great way to help a family member or friend, or aid a charitable organization in achieving a goal. But before you open your checkbook, it’s important to keep in mind how gifting can fit into your larger financial plan.

From a financial planning perspective, once you enter the distribution phase of your life in retirement, gifting serves an important role. For individuals who have accumulated a large amount of wealth, those who have grown older and realize they will not have a chance to spend their wealth, or simply anyone who wishes to help others, gifting represents an often overlooked piece of an otherwise complete financial plan.

Retirees and investors should be aware that larger estates may be subject to federal estate taxes as high as 40%. Gifting, along with a tailor-made estate plan, can solve some of the issues that can be detrimental to an otherwise sound financial plan. Whether it is to ensure a loved one with special needs is cared for in the future, that a family member will enjoy a well-funded college education, to lower possible estate tax, or give to a philanthropic cause, gifting and wealth transfer strategies may be the piece that your financial plan could be missing.

You should talk to your wealth advisor for more information about a personalized gifting plan, but below are a few options to keep in mind if you’re considering giving any large monetary gifts this holiday season.

Monetary Gifts to Loved Ones

Did someone in your family just buy a new home? Are you eagerly awaiting the birth of a new family member? You may want to help pay for home renovations, assist your family in preparing for a new addition, or just allow your family to enjoy a nice vacation getaway together. With this year’s increase in the annual gift tax exclusion, it’s the perfect time to give someone a generous gift that can benefit them now, and that you can enjoy alongside them.

Many people wait to distribute their wealth until after their passing. But, with the IRS’s annual gift tax exclusion, each year, you can gift up to $15,000 to any recipient without having to file a gift tax return. And, annual tax-free gifting can play a role in your overall estate planning strategy, helping to diminish your taxable estate over time.

To give you an idea of how that works, if you had five children, you could give each of them $15,000 for a total of $75,000, without it being considered a taxable gift or counting against your lifetime exemption. Additionally, you and your spouse can each give the same person(s) $15,000, equaling $30,000 per person, tax-free.

Do you have family or friends under the age of 18? Gifts to minors are vital to intrafamily planning and wealth transfer strategies. However, outright gifts to minors can pose problems because they may require legal guardianship. The most popular technique of gifting to minors is by utilizing an UGMA (Uniform Gifts to Minors Act) or UTMA (Uniform Transfers to Minors Act) custodial account. These accounts allow you to gift funds to a minor by way of a custodial investment account as opposed to the expensive and complicated process of creating a trust. It is important to remember that UGMA/UTMA accounts may be subject to the kiddie tax depending on what investments are chosen within the accounts. Consult with your wealth advisor for more information.

Tuition or Medical Expenses Paid

In addition to the $15,000 annual gift tax exclusion, there is also tax exclusion when you make direct payments for someone’s tuition expenses or medical bills as a gift. It’s important to remember that while some books, supplies and equipment do qualify for an exclusion, room and board and some other fees do not. Additionally, payments must be made directly to the health care provider or educational institution and not the individual.

Another great way to utilize the annual gift tax exclusion for educational purposes is through the use of a qualified tuition program, commonly referred to as a 529 Plan. For high net-worth individuals, any amount that exceeds the annual gift tax exclusion may be treated ratably over a 5-year period. This means that it’s possible for a wealthy couple to contribute up to $150,000 in one year to a 529 plan per beneficiary! Not only does this accomplish the objective of funding a minor’s qualified education costs, but it also allows the donor to lower their taxable estate.

Gifts to Qualifying Charities

The holiday season is all about the spirit of giving, and what better way to do so than to donate to charities whose mission align with your values. Charitable donations are typically used to help reach a goal or continue day-to-day functions in an organization. The Tax Cuts and Jobs Act of 2017 increased the deduction to 60% of an individual’s adjusted gross income (up from 50%) for cash contributions made to a charitable organization. Any contributions made before the end of the year are tax deductible, so long as the charity qualifies.

A charity must be registered as a 501(c)3 entity in good standing in order to qualify. Make sure to hold onto all your receipts for reference when filing your income taxes and remember that contributions are only deductible as itemized deductions.

This year, think about all the ways you, your loved ones and your community can benefit from distributing your wealth during the holiday season. If you have any questions about planning for your financial future or tax-free gifting and contributions, send me an email at [email protected].

Lloyd is the Managing Director of the Private Client Group at Sacks & Associates. He employs a holistic approach to financial planning and works with clients during the accumulation phase of their working years through the post-retirement distribution phase of their lives. Lloyd’s areas of expertise include investing and asset management, retirement planning and cash flow analysis, tax planning, Social Security benefit claiming strategies and risk management. Lloyd is a CERTIFIED FINANCIAL PLANNER ™ professional.

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