Leveraging Gift Rules During Retirement

Leveraging Gift Rules During Retirement

Wish to transfer some of your assets to your children or grandchildren tax-free? Understanding the annual gift limits is a good place to start

Leveraging Gift Rules During Retirement

As you or family members approach retirement years, it is important to have a basic understanding of the IRS gift giving rules. With this understanding, there are opportunities to leverage this tax law without creating a tax problem.

The rule

You may give up to $14,000 to any individual (donee) in 2016 and avoid any gift tax filing requirements. If married you and your spouse may transfer up to $28,000 per donee. If you provide a gift to your spouse who is not a U.S. citizen, the annual exclusion amount is $148,000. Gifts in excess of this annual amount trigger the need to file a gift tax form with your individual tax return. The excess gift amounts are then added to your estate for potential estate taxation. The estate tax currently has a maximum rate of 40% and the donor of the gift (or their estate) is responsible for paying the associated tax.

Using the rule to your advantage

The unsaid gem within this tax law is this: You can transfer up to $14,000 ($28,000 if married) to anyone you wish each year tax-free. Additionally, most states also adhere to this federal law. So if you wish to move assets to loved ones without the burden of future taxation, consider the following ideas.

Make periodic gifts. Remember the gift-giving limit is per calendar year. To take full advantage of this tax-free transfer, consider starting now and make periodic payments. Every year you miss out on this annual limit reduces the amount a couple can transfer tax-free to each individual donee by up to $28,000 per year.

Fund college saving. Consider donating money into 529 College Saving plans for children and grandchildren. This can be done with automated deposits into the account. The account could be established by you or your grandchild’s parent.

Pay direct. If you are concerned about exceeding the annual limit for gifts to a single person, consider paying bills directly. Examples of this strategy might be paying medical bills directly to a hospital or directly paying college bills for a loved one.

Leave a cushion. Remember the annual limit. If you provide a gift for the maximum allowable to an individual, you may not provide any other gifts to this person during the year or the event would be deemed excess gift giving and require filing a gift tax form.

Property too. Gifts can include property as well as cash. You can donate investments or other physical property. If you do this, document the fair market value of the property when you transfer it. The IRS is requiring this documentation to ensure the value of the property transferred is consistently valued by you and the person receiving the gift.

Building a down payment. Often children burdened with college debt cannot afford to save the down payment required to own their first home. You can aid in this by helping build a down payment through gift transfers.

Keep it in perspective

Understanding and leveraging the annual gift tax rules can create tremendous tax savings. But this strategy should be done in conjunction with understanding your personal financial needs. Providing gifts of funds that you might later need for your own retirement can be problematic. It is best to review your gift plans prior to taking action.

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