By David Thatcher, CFP®, Partner & Senior Financial Advisor
December 2016
Around this time of year, shopping malls are filled with increasingly frantic shoppers, looking for that “perfect gift.” The holidays can be a wonderful time of generosity and showing our loved ones how much they mean to us. Yet the challenge of finding the right gift can be quite a challenge.
In the last post, I shared some strategies to end your year well. The last tip was about gift giving without tax consequences. Your generosity can have the double benefit of building a legacy for your family as well as protecting your wealth from taxes! If you’re looking for ideas for what to give the people who matter most to you, consider this.
As someone who is in their “Second Growth” phase of life, you probably have a desire to manage your finances in a way that is responsible and establishes growth over time. You want to contribute to the wellbeing of our country with your taxes, but you don’t want to give Uncle Sam more than you have to.
The IRS requires a portion of the money you earn in income taxes and also takes a portion in sales transactions. While the term “benevolent” isn’t usually one paired with the Internal Revenue Service, they actually give a lot of leeway when you are giving money away. They don’t require a gift tax unless the amount you are giving the beneficiary exceeds $14,000.
The official definition of a gift is “ transfer of property (including money) by one individual to another while receiving nothing, or less than full value, in return.” Any time you help someone out with something of monetary value, the IRS would consider that a gift. However, they don’t really take notice unless that gift is pretty sizable.
The gift could be in the form of money, but the definition also extends to real estate, stocks, bonds, and other financial products.
Now, I don’t know how generous you’re feeling this Christmas, but this tax-free gift giving can be maximized in a couple of ways.
As an individual, you are able to give gifts, up to $14,000 to as many individuals as you choose. This gift money can go towards an overall total of unified credit of $5.45 million, the amount of money you are able to give in your lifetime that is tax sheltered.
If you are married, your spouse can also give up to $14,000 to individuals as well. If you and your spouse wanted to give the maximum amount without being taxed to your married son or daughter, you could give a total of $56,000. (For example, if you and your spouse each wrote a check to both your son and daughter-in-law.)
You can also exceed the $14,000 limit if the money is providing assistance for special circumstances. If the money is going towards a student’s education, or towards a medical bill, that money isn’t considered a gift. You can also give your spouse as much money as you want if you have separate bank accounts.
If you are considering going this route, you’ll want to make sure you know the parameters of your generosity, to avoid unnecessary taxes or penalties.
If gifts exceed $14,000, you need to report it to the IRS, using a gift tax return, or Form 709. Money reported through this form will count towards the total amount that you can not pay taxes on in your life. As of 2016, the total amount of this unified credit was $5.45 million. This tax exemption includes both gift tax and estate tax, so if you gift someone more than $14,000, that will be subtracted from the total amount that you can shelter from estate taxes.
Make sure you don’t exceed the total $5.45 million. If you do, you could be paying up to 40% in taxes!
Are you planning on utilizing this double benefit of gifting this Christmas? If so, you may want to check with your financial planner first to ensure you’re working within the benefits of the tax exclusions. Give us a call today at 866.888.6563 for some advice as you head into this holiday season!
About Cypress Wealth Services
Cypress Wealth Services, an independent RIA firm providing financial planning and investment management to high net worth individuals, families, business owners, and institutions. CWS is comprised of professionals with diverse backgrounds and extensive experience and qualifications. CWS is uniquely qualified to serve a broad range of client needs. Their experience and expertise act as a foundation for their client service process, The Second Growth, which focuses on efficiently protecting, growing, and transferring to their loved ones the wealth and legacy a person has already built. With offices in Palm Desert, and Anchorage, the firm serves clients across the country. Learn more by visiting www.CypressWS.com.
