How Can a Teenager Begin to Invest? Dear Carrie: My 15-year-old grandson called me the other night and asked if he should open a brokerage account. He has $500 to invest. What should I tell him? Thanks! — A Reader Dear Reader: I must say I'm impressed! For a teen to want to …Read more. Top 10 Year-End Tax Planning Moves Dear Readers: With time rushing by and the end of 2015 in sight, you may be lamenting that you haven't accomplished all that you had planned. But even if you'll have to put off certain things until 2016, you still have time this year to make some …Read more. Does an Ex-Spouse Qualify for Survivor Benefits? Dear Carrie: I have a question regarding my Social Security benefits from my deceased ex-spouse. We were married about 16 years, we divorced and I remarried. I am now divorced from my second spouse. Am I now able to receive survivor benefits from …Read more. What's the Best Life Insurance Policy for a Young Family? Dear Carrie: My husband and I are in our thirties and have a three-year-old. I'm thinking that we should have a life insurance policy, but the choices are overwhelming! How can I figure this out? — A Reader Dear Reader: This is the perfect …Read more.more articles
Want to Make a Tax-Free Gift? Pay Attention to the Dates and Dollars
Dear Carrie: For gift tax purposes, do you have until April 15 to make a gift for the previous calendar year, similar to an IRA? Also, what happened to the one-time gift of $50,000? And if you make a large one-time gift, does it preclude future annual gifts of $13,000 or $26,000? — A Reader
Dear Reader: No matter how the government tries to clarify things, gift taxes always seem to raise questions — and you've posed three good ones. Let me start by putting the gift tax in perspective.
The gift tax was established to keep people from giving away their entire estates during their lifetime in order to avoid estate taxes. According to the IRS, a gift is the transfer of money or property to an individual where no compensation is received in return. The general rule is that any gift is a taxable gift. Fortunately, as with most rules, there are exceptions. And the exceptions to the gift tax rules allow individuals to give away a certain amount before having to pay taxes on the gift.
Currently, an individual can gift up to $13,000 a year to anyone — and to an unlimited number of people — without incurring gift taxes or even having to report the gift. A married couple splitting gifts can currently give up to $26,000 a year gift-tax free.
There's also a lifetime exclusion that can be particularly confusing. The lifetime exclusion historically has allowed an individual to give away a total of $1 million in the course of his or her lifetime — above and beyond the $13,000 annual limit — before having to pay gift taxes. I say "historically" because legislation passed in December 2010 raised this exclusion to $5 million through 2012. It's hard to predict what will happen beyond that date.
With these facts in mind, let's look at your specific questions.
GIFTS MUST BE MADE BY DEC. 31
Unlike IRA contributions, you don't have until the tax due date to make gifts for the previous year. Gifts only count in the calendar year in which they're given. So if you had wanted to make a gift for 2010, in terms of the gift tax, you would have had to make it by Dec. 31 of that year.
But unless you make a gift of more than $13,000 to any one individual, the date is inconsequential from a tax perspective because you don't have to report it.
YOU CAN MAKE A LARGER ONE-TIME GIFT TO A 529 ACCOUNT
In terms of a $50,000 one-time gift, I think you're referring to contributions to a 529 college savings plan. You are allowed to give the equivalent of a five-year gift to a 529 account in a single year without incurring a gift tax. Prior to 2002, the individual annual gift tax exclusion was $10,000, so an individual could give a total of $50,000.
Now, with the annual exclusion at $13,000, an individual can give up to $65,000 to a 529 in one year. Couples can double that to $130,000. But, again, it's considered a five-year gift, so you can't give any more to the beneficiary of the 529 for five years. If you do, it will count toward your lifetime exclusion. You can, however, continue to give $13,000 per year ($26,000 for couples) to anyone else gift-tax free.
OTHER TAX-FREE WAYS TO GIVE
There are other ways to give that don't raise tax concerns. For instance, you can make unlimited gifts to a spouse or a qualified nonprofit institution without incurring a gift tax. Plus, "qualified transfers," or direct payments for tuition or medical expenses to a school or medical provider for someone else, aren't considered taxable gifts and aren't included in the $13,000 annual limit. This can be a particularly effective way to give extra help to children and grandchildren.
Gifting can be a strategic part of your estate plan as well as a welcome boost for the lucky recipient. But anything to do with taxes can easily become complicated. It never hurts to talk to your tax adviser; it may make you feel even better about being generous.
Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER (tm) is president of the Charles Schwab Foundation and author of "It Pays to Talk." You can e-mail Carrie at firstname.lastname@example.org. This column is no substitute for an individualized recommendation, tax or personalized investment advice. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
COPYRIGHT 2011 CHARLES SCHWAB & CO. INC. MEMBER SIPC