'Tis the Season for Giving!
With the holidays and year-end fast approaching, the thoughts of many are turned towards giving, both to friends and family as well as charitable. Perhaps thinking of the possible tax ramifications of giving isn't at the forefront of your mind, but there are some things you may need to know as you make your plans.
Since this will be my last writing prior to Christmas, let's deal first with giving to family and friends. In two weeks, we'll tackle some issues surrounding philanthropic giving that you need to know for tax time.
As to giving to your loved ones or other individuals, did you know that there is a limit to what you can give each year without having to file a Gift Tax Return? This limit is called the Annual Exclusion.
Each year, a person may gift up to the Annual Exclusion amount of property or money to as many people as they choose. For 2014, you can give up to $14,000 per person if you are single, or up to $28,000 per person ($14,000 each) if married. Giving that exceeds these limits will require the filing of a Gift Tax Return and the use of a portion of your lifetime gift tax exemption.
It is important to note that these limits are for the total gifts made during the entire year. Some people inadvertently have run afoul of these rules by not realizing they have to combined all gifts made during the year, such as for birthdays, Christmas, "just because", etc.
Further, for married couples the gift-splitting election is an option even if the gift is given by one spouse only. Gift splitting requires the consent of the non-giving spouse and may require both to file a gift tax return.
The timing of the gift can be important too. To count as a gift given during this year, the gift must be completed by December 31. When a gift is considered as completed can be different depending on the type of gift. In general, it means the giver has given up control of the gift and no longer has the power to change its recipient(s).
For example, a monetary gift in the form of a check is considered complete when the check is deposited into the recipient's account. A gift of stock is complete when the securities have been transferred into the beneficiary's account.
Here's a tip - direct payments you make on behalf of another person for tuition, dental or medical expenses do not fall under these rules, provided the payments are made directly to the school or medical provider. No gift tax return is required, and there is no dollar limit. The tuition can be paid for primary, secondary or post-secondary education.
Giving can also be used for effective tax planning. The gift of highly appreciated property to a family member in a lower tax bracket can be a wise tax-saving strategy for the family as a whole. The person receiving the gift takes the donor's cost basis in the property and likely will pay less income tax than the giver would when the asset is sold.
However, bear in mind that under the so-called "kiddie tax" rules, the investment income of children under age 18 and full-time students under 24 who do not provide more than half of their own support will be taxed at the parents' highest tax rate if the investment income exceeds a threshold amount. The strategy of giving appreciated property that is to be sold could be negated if the kiddie tax applies.
Another tip is that generally it is not a good idea to give stock that you currently hold in a loss position; i.e., it has decreased in value since you acquired it. In most such cases it would be better to sell the stock and simply give the money. This way, you are the one that gets to take the loss, which if you are in a higher income tax bracket could benefit you more than it might the recipient.
Keeping these issues in mind as you make your giving plans might just help to make your holidays (and tax filing time) just a bit more jolly. Merry Christmas everyone!
