Demystifying the Gift Tax

 Recently we have been receiving quite a few inquiries from parents looking to gift money to their children.  People may give for various reasons, but one of the most common reasons we have heard lately is for a down payment on a first home.  There seems to be a lot of confusion about how much can be gifted annually without being subject to the “gift tax”.

For 2013, the Annual Gift Exclusion Amount is $14,000

What this means is you can gift $14,000 in 2013 to your son, daughter, niece, nephew, neighbor, or a random guy on the street. You can give EACH of them $14,000.  The $14,000 gift does not have to go to a member of your immediate family (they don’t even have to be related to you at all for that matter).  If you are married, then you and your spouse can each give $14,000 to anyone you chose without being subject to gift tax.  Just to be clear, that means if you are married you can gift $28,000 to anyone you want in 2013 and pay nothing in gift tax on that gifted money.  Also, it doesn’t have to be cash. You can also gift stocks, bonds, property, artwork, etc.

Now is where things get a little trickier...

Let’s say that you want to give your son $50,000 for whatever reason.  So you and your spouse each gift $14,000 for a total of $28,000.  That leaves $22,000 remaining that you need to transfer to your son.  How can you get him that money without being subject to gift tax? Simply gift him the additional $22,000 and file IRS form 709 and potentially pay no tax on the additional gift!  Notice I did say “potentially” no gift tax.  For those of you that intend to give more then $5.25 million there could be some gift tax liability. However, for those of you reading this who never intend to give away that much, you shouldn’t be subject to any gift tax on the additional $22,000. 

A little history on why this works: Prior to 1976 wealthier people that were looking to avoid paying estate taxes at their death found a way to circumvent the estate tax by simply gifting assets to their heirs while they were still alive. In 1976 congress “unified” the estate and gift tax law so that any gifts you made during your lifetime over the annual exclusion amount ($14,000 in 2013) would count towards your lifetime exclusion amount. In 2013 the lifetime exclusion amount is $5.25 million per person.  So a married couple could gift $10.5 million over their lifetime without paying gift tax. 

So, John and Jane Doe could gift $50,000 to their son outright and not pay any gift tax on the entire amount. The first $28,000 would fall under the annual exclusion amount and the remaining $22,000 would be applied to their lifetime exclusion amount of $10.5 million. Based on the current laws of 2013 John and Jane would have $10,478,000 left of their lifetime exclusion.

Consult with a qualified tax professional and your financial advisor for help navigating the gift tax.

For additional information please refer to IRS publication 950. The link is included below: http://www.irs.gov/uac/Publication-950,-Introduction-to-Estate-and-Gift-Taxes-1

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The information contained in this report does not purport to be a complete description of the subjects referred to in this material.  The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  The example provided is hypothetical and for illustration purposes only.  Actual investor results may vary.  Please not, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation.

Leaving a Legacy

 There are many ways to make your mark in the world today.  Some give of their time and talents through volunteering and others give financially to the causes near and dear to their hearts  Consider a hypothetical couple that wants to preserve their legacy and give to four organizations that they would like to help succeed, we’ll call them Dick and Jane. Dick and Jane have been good savers throughout their working years. Fortunately, they accumulated enough assets to care for their own retirement needs with a high expectation of having a surplus, regardless of what financial markets deliver for their remaining years. In a recent annual review meeting, Dick and Jane determined that it was time to make financial contributions to some of area institutions that they feel are benefitting the larger society. Essentially, they wanted to help ensure these organizations are around to enrich other lives like they have their own. 

Suppose Dick and Jane could comfortably gift $50,000 each to four organizations; Detroit Institute of Arts, Michigan Opera Theatre, Michigan Nature Conservancy, and the Detroit Symphony.  Each of these organizations contributed to their well-being and they may consider it is time to “give back”.  Working together, we may be able to identify securities in their portfolio that could help maximize their contributions as discussed in this prior blog .  If Dick and Jane would like their gifting to remain anonymous, they could consider establishing a Donor Advised Fund (as I discussed in a recent blog) to facilitate the donations. In the end, Dick and Jane can make tax leveraged gifts benefitting four organizations with the hopes that these groups will continue to enrich the lives of Michigan residents.  As a fellow Michigander and financial planner, it would be rewarding to see them leave their mark. 

If you are planning to leave a legacy, here are 4 Steps to get you started:

1. Determine your financial ability to give financially – never give away a dollar that you might need for your needs
2. Research possible organizations
3. Determine the most tax efficient manner to give – preferably appreciated securities
4. Enjoy knowing that you have made a significant contribution to society

Timothy Wyman, CFP®, JD is the Managing Partner and Financial Planner at Center for Financial Planning, Inc. and is a frequent contributor to national media including appearances on Good Morning America Weekend Edition and WDIV Channel 4 News and published articles including Forbes and The Wall Street Journal. A leader in his profession, Tim served on the National Board of Directors for the 28,000 member Financial Planning Association™ (FPA®), trained and mentored hundreds of CFP® practitioners and is a frequent speaker to organizations and businesses on various financial planning topics.

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The illustration above is hypothetical.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.  You should discuss any tax or legal matters with the appropriate professional.

A GIFT FOR A LIFETIME: Grandparent Giving for Education

 We all know grandparents and grandchildren have a special bond. If you are a grandparent of college age children, or those attending private schools in some cases, you have to be alarmed about the amount of debt students are racking up. Economists are estimating students will be paying loans for as long as 20 years, affecting their ability to get homes and cars.*

Grandparents have a special tax saving measure that will be a wonderful gift to their favorite student.  They can make direct payments of tuition to a school free of gift tax.  So what does that mean to the grandparent?  It means that even if you have contributed to 529 plans or given to your student directly, you can exceed the $13,000 annual gift tax exclusion by writing the check directly to the educational institution for tuition payments.  The grandparent is giving now and also reducing their future taxable estate.

What does it mean to your grandchild?  It could mean less debt and the ability to start their professional career on a more solid financial basis.   With the giving season right around the corner, this may be a strategy you want to consider. To learn more, contact your financial planner at the Center.

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Source: Huffington Report, 7/20/2012

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.  You should discuss any tax or legal matters with the appropriate professional.

The Gift that Keeps on Giving

As the holiday shopping season approaches, many of us struggle to make our gift lists.  This can be a frustrating exercise, particularly when it comes to you adult children and grandchildren.  What can we possibly give them that will be appreciated and not be sitting on the dresser in a week when the next new gadget comes along?  Why not consider a gift that will keep on giving long after your gone?

If your children or grandchild had earned income from employment during 2011, you can contribute up to $5,000 or 100% of their total earnings (whichever is less) in a ROTH IRA in the child’s name.  [Remember that what you put in to the ROTH IRA counts toward the $13,000 annual gift exclusion; $26k if your spouse contributes to the gift].

Why is the ROTH IRA such a great gift?

• It grows tax-free over time.  A $5k contribution to a 16 year-old’s ROTH IRA earning 8% each year will grow to $217,000 by age 65*.  If the child works summers during high school and college and contributes each year, the future balance in the account will likely be significantly larger.
• ROTH IRAs provide tax-free withdrawals after age 59 ½**.
• In some specific situations, the child can pull out contributions (not earnings) free of tax (i.e. for the purchase of a first home).

A Roth IRA can be one of the best gifts you can give…one that will be giving for years to come.

*This is a hypothetical illustration and is not intended to reflect the actual performance of any particular security.  Future performance cannot be guaranteed and investment yields will fluctuate with market conditions.

**Unless certain criteria are met, ROTH IRA owners must be 59 ½ or older and have held the IRA for five years before tax-free withdrawals are permitted.