Gifting Strategies to Keep in Mind at Year-End

December 15, 2016

The year is coming to a close, and now is the time to take advantage of some tax saving opportunities including giving to family members or donating to charity.

Gifts under annual exclusion – under current law, single taxpayers can give up to $14,000 to any donee without being subject to gift taxes, a married couple can give up to $28,000. This annual exclusion applies to individual donees, so you can make a tax-free gift of $14,000 to any number of individuals without being subject to gift taxes.

Educational and Medical Payments – making payments directly to an educational institution for a person’s tuition (ex. children or grandchildren) do not count against the annual gift tax exclusion. Be cautious to not gift the student or individual the money for their tuition or else gift tax laws will apply. This same principle applies to medical expenses; you may pay an unlimited amount of medical expenses for any donee as long as the payments are made directly to the medical institution or doctor.

529 Plan Contributions – consider contributing to a 529 plan if you would like to help your children or grandchildren with education costs. Section 529 plans offer a special gifting feature that allows you to make a lump-sum contribution of up to five times the annual gift tax exclusion, which is $70,000 for an individual and $140,000 for a married couple. An election to spread the gift evenly over five years avoids federal gift tax, provided no other gifts are made to the same beneficiary during the five-year period.

Roth IRA Contributions – if you have any working children, consider setting up and contributing to their Roth IRA. For 2016, you can contribute up to $5,500 or a maximum of the child’s 2016 earnings if they are less. These contributions will count toward your annual gift tax exclusion but the benefit of the Roth is that the contributions can be withdrawn tax-free at any time. The earnings generally cannot be withdrawn prior to age 59½ without paying the 10% early withdrawal penalty with the following exceptions:

  • Distributions up to $10,000 for the purchase of a first home
  • Distributions for qualified education expenses

Charitable Donations – when donating to charitable organizations, be sure to give appreciated assets and not property that has declined in value. If you have owned the appreciated property for more than one year, you can generally deduct the full fair market value at the date of gift, without the charity or you having to pay any income taxes on the appreciation. However, if you own property that has declined in value, sell the property, claim the capital loss on your tax return, then donate the proceeds from the sale.

There are many favorable tax gifting strategies that can be utilized for year-end tax planning. If you have any questions or are looking for assistance with your gifting strategies, please contact Aronson’s Anatoli Pilchtchikov, CPA, at 301.231.6200.