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Gifting

Gift Giving the Tax-Free Way

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Gift Giving the Tax-Free Way

Although it’s the season of giving, no one wants to share with the IRS. Luckily, the law provides you many opportunities to give gifts to family, friends, and charities tax-free. Some are straightforward, while others may require the help of a professional.

Your Yearly Coupons

Each year on January 1st, everyone receives what can be thought of as yearly coupons for tax-free gifts. There are several different ways that you can redeem those coupons:
  • Annual exclusion gifts. These gifts are transfers of money or property that do not exceed the annual gift tax exclusion. These gifts can be given on one or more than one occasion throughout the year, the key is that you add up the gifts throughout the year. In 2018, you can give up to $15,000 ($30,000 for married couples) per recipient without having to pay any gift tax or file a gift tax return. These gifts can be cash or property but they must be of a “present”interest. Gifts using trusts or certain types of property (like closely held businesses) can be tricky because the “present” interest requirement can be missing. If you plan on using a trust or an LLC to make your gift, it’s best to work with a professional.
  • Pay medical bills. The IRS also allows you to pay an unlimited amount of someone’s medical bills, without worrying about the gift tax. However, the payment must be made directly to the doctor, hospital, or other medical provider in order to qualify.
  • Pay tuition. Additionally, you are able to pay an unlimited amount of tuition bills for the benefit of someone else, as long as the tuition is paid directly to a qualified educational institution. One big issue here is that the gift must be only for tuition – books, fees, living expenses, travel, and other costs of education do not qualify.
  • Give to charity. For those of you who are philanthropically minded, you can give as much money or property to a qualified charity as you want without worrying about the gift tax. As an added benefit, unlike the gifts above, you may also be entitled to an income tax deduction for the charitable gift.

Your Once-In-A-Lifetime Coupon

In addition to our annual coupons, we all have a once-in-a-lifetime coupon for taxable gifts, those that exceed or do not qualify for the annual exclusion, called the unified credit. It’s called a unified credit because it unifies the gift tax with the estate tax into a coordinated tax system. Unlike the annual coupons you read about above, once you spend the value of the unified credit coupon for a taxable gift, it’s gone.
Many people assume that because it says taxable gifts, they’ll have to pay the gift tax. Luckily because of the unified credit coupon, most people will never have to actually pay any gift tax. You only have to pay gift tax if your lifetime gifts exceed the unified credit coupon. Under the current law, the base amount of the unified credit starts at $10 million and increases each year through 2025. In 2018, due to a change in the inflation adjustment utilized, we expect that the unified credit amount will be about $11.18 million. However, if you make a taxable gift, you are required to file a gift tax return with your income taxes.

When should I talk to an estate planner?

If you plan on making a gift in excess of $15,000 in 2018, then you should talk with us first. Sometimes the best way of making a gift is to just write a check, but other times giving in a trust, through an LLC, or with an undivided interest in property can make more sense and offer your recipient greater benefits (like privacy or asset protection).

While we don’t suggest you give away anything that you might need, if you do have some surplus, gifting programs are a fun way to see your loved ones enjoy your generosity. Call or contact us today so we can help make sure you do it without drawing the attention of the IRS.

5 Easy Tips to Simplify Your Year End Charitable Giving

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Are you planning on making charitable donations before the end of the year?  The IRS reminds us that you must itemize deductions on your tax return to claim a deduction for these gifts.  In addition, the following five tips can help make those year-end charitable gifts count.

Tip #1 – Give to a Qualified Charity.  Only gifts to a “qualified charity” are deductible on your income tax return.   The IRS offers a handy website, the Select Check tool, to determine whether your favorite organizations are qualified.  You can also deduct donations made to churches, synagogues, temples, mosques, and government agencies even if they are not listed in the Select Check database.

Tip #2 – Give Some Cash.  Gifts of money can be made by check, electronic funds transfer, credit card, or payroll deduction.  In order to be able to deduct a monetary gift on your tax return, you must have a bank record (cancelled check, bank statement, credit card statement) or written document from the charity (listing the organization’s name and date and amount given), regardless of the dollar amount donated.  For payroll deductions, keep your pay stub(s), W-2, or other document from your employer which shows the total amount withheld along with the pledge card showing the name of the charity.

Tip#3 – Give Some Stuff.  You can take a tax deduction by giving away your gently used stuff, including household items (furniture, furnishings, electronics, appliances, linens) and clothing (shirts, blouses, pants, skirts, shorts, shoes).  If possible, get a receipt from the charity which includes the organization’s name, date of the contribution, and a detailed description of your donated items.  If you leave your stuff at an unattended drop site, make a written record of the donation.

Tip #4 – Give Before the End of the Year.  Donations are deductible on your tax return in the year they are made.  Gift checks count on your 2015 income tax return as long as they are postmarked in 2015 and credit card donations charged before the end of 2015 still count this year even if you do not pay the bill until 2016.

Tip #5 – Keep Good Records.  Always keep accurate records of charitable gifts you make – list the date of the contribution, a detailed description of the donation, the name and address of the organization, the fair market value of the property at the time of the donation, and the method used to determine the value.  You must obtain an acknowledgment from the organization if a donation (either cash or stuff) is valued at $250 or more.  If the donation consists of an automobile, boat or airplane, special rules apply which can be found on the IRS website.

Have Questions About Deducting Charitable Gifts?

If you have questions about making deductible charitable donations, please call our office to arrange for a convenient time for us to speak.

Don’t Miss Out on These Year-End Tax Planning Strategies

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Now is the ideal time to start year-end tax planning.  Below you will find a variety of tax-saving strategies you should consider using immediately so that you can get your 2015 tax house in order well in advance of the fast-approaching holiday season.

Plan Now for a Bountiful Fall Harvest

The last thing you want to worry about during the holiday season is tax planning.  Now is the perfect time to discuss the following tax-saving opportunities with your financial team so that you can implement them in the next few weeks:

  • Check your portfolio to determine which dud stocks can be sold to harvest losses and offset gains.
  • If you’re in the 25% or higher marginal federal income tax bracket and own mutual funds in taxable accounts, check your mutual fund company’s website for projected capital gains distributions during November or December. Given six strong years for many funds, coupled with any 2015 investor defections, the distributions could be surprisingly large for some funds. You should consider selling before the ex-dividend date and moving to a similarly allocated but more tax-efficient vehicle like an exchange-traded fund (ETF).
  • Analyze your 2015 vs. 2016 projected tax liabilities and accelerate or decelerate income and capital gains accordingly.
  • Maximize contributions to your 401(k) and IRAs – if you are age 50 and over you should take advantage of the extra $1,000 (for an IRA) or $6,000 (for a 401(k)) you can contribute to your accounts in 2015.
  • Wipe out that Flexible Spending Account by incurring medical expenses.
  • Purchase an electric car.
  • Install a renewable energy source in your home such as a solar-powered water heater.
  • Refinance your mortgage.
  • Make an extra mortgage payment or two.
  • Pay estimated state and local taxes and property taxes.
  • Review and adjust your withholding and estimated tax payments to insure that you avoid underpayment penalties.
  • If you are the Trustee of an irrevocable trust, you should consider whether it is appropriate under the discretionary terms of the trust agreement to disperse distributable net income (DNI) to beneficiaries in lower tax brackets.

Beware:  What may be tax-advantageous for one taxpayer may be tax-detrimental for another.  For example, the Alternative Minimum Tax (AMT) is snagging more and more taxpayers and reducing regular tax liability may increase AMT exposure.  Thus, before making any year-end tax moves, you must consult with your financial team to insure that the moves you make are the right ones.

Plan Now for an Early Gift-Giving Season

Below are some gifting ideas you can use now to benefit family, friends, your church, your alma mater or those in need:

  • Make cash gifts to family and friends – in 2015 the maximum amount an individual can give without incurring a gift tax is $14,000, married couples can give $28,000.
  • Make cash gifts to non-profit organizations.
  • Donate appreciated assets, such as stock or real estate, to non-profit organizations.
  • Set up a donor-advised fund.
  • Supercharge a 529 plan for your children or grandchildren –individuals can contribute $70,000 and couples can contribute $140,000 to a plan without incurring any gift tax; in addition, some states offer tax deductions or credits against 529 contributions.
  • In this low interest rate environment, inter-family loans are worth considering and can be a powerful tool to transfer wealth without incurring any gift or estate tax.
  • If you are considering any advanced gift planning, such as gifting through a grantor retained annuity trust (GRAT), family limited liability company or private foundation, then time is of the essence to get the trust or entity created, funded and initial gifts made before December 31.
  • If you have used up your entire lifetime gift tax exemption in prior years, note that you have gained an extra $90,000 (or $180,000 per married couple) to gift in 2015.
  • If you have an IRA and are over age 70½, need deductions and are charitably inclined, stay alert for year-end legislation that allows individuals to donate up to $100,000 from an IRA and exclude the donation from taxable income.

Begin Year-End Tax Planning Right Now

Ideally tax planning should be done throughout the year, but unfortunately most people do not even start thinking about their tax situation until late into the fall.  Doing nothing at all will leave less in your pocket and planning done at the eleventh hour may end up sloppy and incomplete.  We encourage you to consult with your financial team now so you can insure that you are taking full advantage of all appropriate year-end tax saving opportunities.

Year End Estate Planning Tip #5 – Make Gifts That Your Family Will Love but the IRS Won’t Tax

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Don’t let the chaos of the holiday season prevent you from avoiding federal gift tax by making “annual exclusion” gifts, medical payments gifts, and educational gifts.

Make Annual Exclusion Gifts

“Annual exclusion” gifts are transfers of money or property in an amount that does not exceed the annual gift tax exclusion.

In 2014, the annual gift tax exclusion is $14,000 per recipient, and it will remain at $14,000 per person in 2015.  Therefore, you can give up to $14,000 to as many individuals you choose on or before December 31, 2014, and then give another $14,000 to the same people on or after January 1, 2015, and you will not have to file a federal gift tax return (IRS Form 709).  In other words, the IRS doesn’t consider gifts that are equal to or less than the annual exclusion amount to be taxable gifts at all.

Married couples can take double advantage of the annual exclusion and gift $28,000 in 2014 and then another $28,000 in 2015.  But note that in some situations, a couple may still need to file a gift tax return to report any “split gifts” – they’ll need to consult with their estate planning attorney or accountant to be sure. Also, you may need to file a gift tax return if you make gifts that exceed the annual exclusion amount or if you make gifts that don’t qualify for the annual exclusion – your attorney or accountant can guide you through this.

Make Payments that Qualify for the Medical Exclusion

Another type of transfer that the IRS doesn’t consider to be a gift for gift tax purposes is a payment that qualifies for the medical exclusion.

Payments that qualify for this exclusion are ones that are made directly to an institution that provides medical care to an individual or to a company that provides medical insurance to an individual.  In general, medical expenses that qualify for this exclusion are the same as those that are deductible for federal income tax purposes.

Therefore, in 2014 you can pay for your grandchild’s emergency appendectomy in the amount of $20,000 and also give your grandchild an additional $14,000 by December 31, 2014, and then another $14,000 on or after January 1, 2015, and you will not have to file any gift tax returns.

One incredibly important detail – in order to qualify for the medical exclusion you must make payment directly to the institution providing the medical care or company providing the medical insurance. If you give the money to the individual receiving the medical care or insurance benefit, even with explicit instructions that it be used to pay for the medical care, your payment will be considered a gift.

Make Payments that Qualify for the Educational Exclusion

Another type of transfer that the IRS doesn’t consider to be a gift for gift tax purposes is a payment that qualifies for the educational exclusion.

Payments that qualify for this exclusion are ones that are made directly to a qualifying domestic or foreign institution as tuition for the education of an individual.

For example, in 2014 in addition to paying for your grandchild’s emergency appendectomy (see above), you can pay your grandchild’s college tuition in the amount of $25,000, give your grandchild an additional $14,000 by December 31, 2014, and then another $14,000 on or after January 1, 2015, and you will not have to file any gift tax returns or pay any gift tax.

Two incredibly important details – in order to qualify for the educational exclusion

(1) You must make payment directly to the institution providing the education, not to the individual receiving the education, and

(2) Your payment must be for tuition only, not for books, supplies, room and board, or other types of education-related expenses.

If you fail to follow either of these restrictions, the payment will be considered a gift.

If you have any questions about how to make the most out of gifts to your family, please contact our office.