Today, we helped a client gift money to her granddaughter, who’s now in 5th grade.
We get quite a few questions from clients wanting to make gifts to family members, so if you’re thinking along those lines, here’s a few things you’ll need to know:
1). For 2015, the annual exclusion amount for gifts remains at $14,000.
(That’s the same as last year, by the way).
That means you can make gifts of up to $14,000 per person per year without reporting them to the IRS. There’s no limit on the number of people you can make gifts to.
2). If you are married, you and your spouse can join together in making a larger gift of $28,000 ($14,000 each).
If you do this, make sure to tell your tax preparer. You won’t owe tax but they do need to report this type of “gift splitting.”
3). Want to make even larger gifts?
You can make even larger gifts without paying tax, since you are permitted to give away during life or at death up to the federal exemption amount of $5.43 million per person.
There are also special rules for making larger gifts to college 529 plans. You can “bunch together” five years of gifts at one time to make a bigger impact.
It’s too complex to go into the details here, so discuss your plans with your tax advisor, attorney, or financial advisor. Some caveats do apply, and larger gifts need to be reported to the IRS.
4). Gifts you make are not tax-deductible unless they are to a qualified charity. Sorry.
But here’s the good news – the person receiving the gift does not pay any tax on receiving it.
5). What’s the best way to gift money to a grandchild?
Everyone’s circumstances and goals are unique, but my preference – all other things being equal – is for grandparents to contribute to a college 529 plan, assuming they think some kind of higher education is in the cards down the road (technical and trade schools, and overseas establishments, can also qualify). It’s hard to beat 529 plans with their superior potential for tax-free growth.
Jonathan Clements, one of my favorite financial columnists, makes this one of his top financial rules, saying “never use a custodial account to save for college costs. Instead, open a 529 college savings plan or a Coverdell education account. Both will give you tax-free growth and shouldn’t badly hurt financial aid eligibility.”
Coverdells, also known as Education IRAs, are great, but many people have income too high to qualify.
Another fantastic choice is to contribute money to your child or grandchild’s Roth IRA, assuming they’re old enough to have earned income.