At Christmastime, children often rummage through the packages under the tree to open the biggest box first. But adults know that the best presents come in small packages- envelopes.
For those who want to give stocks and bonds rather than toys this Christmas, Ralph Tower, a professor in Wake Forest’s Calloway School of Business and Accountancy since 1980, has some suggestions. Tower is a licensed certified public accountant in North Carolina and Florida.
He lists five major ways to give generously and wisely this holiday. The first one on his list is no surprise.
“The very best is an unrestricted gift of cash,” he says. “There are no strings attached to a cash gift and if it’s under $10,000, it avoids being counted towards the gift tax.”
He adds that monetary gifts are usually not counted toward the recipient’s taxable income either, which makes the gift all the more festive for both parties.
Second on Tower’s holiday financial list are securities, commonly called stocks and bonds. But, he cautions against giving securities that have already increased in value because the recipient will have to pay income taxes on the total growth of the stock from the original value, in addition to the gift taxes the donor has already incurred.
“One of the most common mistakes is giving appreciated stock, or stock that has increased in value since the original purchase, because you end up paying two taxes on the same gift,” Tower warns. “Better to give stocks or property that are going to increase in value in the future.”
Tower recommends savings bonds only if they are issued in the recipient’s name. Passing on savings bonds between family members immediately triggers federal income tax for the donor and later to the recipient, on his or her share of the increase in value.
Investment property, such as Grandpa’s coin collection or a piece of the family’s land, makes a wonderful sentimental gift for the holidays, but falls under the same warning as securities. Those kinds of gifts have usually already appreciated in value and can trigger tax problems.
One of the newest options for financial giving is the Section 529 Plan, a state-sponsored college savings plan started in the fall of 1999. This plan is especially viable for grandparents, who have the opportunity to generously invest in their grandchildren’s education while reaping a tax benefit.
A couple can put up to $100,000 at one time in each child’s account without having to worry about estate, gift or the generation-skip tax (that amount counts for five years of split-gift giving). The money grows tax-deferred until the student withdraws it for college, but the real gift comes when the money is taken out. At that point, account earnings are taxed at the student’s income tax bracket, usually less than 20 percent.
The plan has hidden benefits, too, Tower points out. If Junior decides college is not for him, the gift giver can change the beneficiary’s name to a sibling’s. Or, if he gets a scholarship, the money can stay in for graduate school or mid-career education. And, in case the money is needed for something else, it can be taken out at any time with a 10 percent penalty.
Before passing on a rare stamp collection or writing a child a check this holiday, understanding the tax laws the gift may fall under is important.
“The first step in financial giving this Christmas is to establish to whom you’re giving the gift,” Tower says. “Depending on where the gift is going, there are many ways to avoid paying a gift tax on it.”
A cumulative tax that considers all past taxable gifts in its estimation, the federal gift tax was created in 1924. The amount is calculated using a standardized rate table. With the exception of some charitable, non-profit and educational gifts, most financial gifts to a recipient worth more than $10,000 fall under its domain.
For those who plan to give larger gifts this Christmas, Tower notes some tax benefits that make giving easier on the bank account.
One tax benefit perfect for the holidays is the unlimited marital deduction. Spouses can give each other an unlimited amount of money or property, such as jewelry or cars, without incurring the federal gift tax.
Another benefit for married couples is the use of split gifts to maximize the $10,000 annual federal gift tax exclusion. Couples can combine their maximum tax-free giving and, between the two, give up to $20,000. If Grandma and Grandpa want to give their son’s or daughter’s family an extra financial boost around the holidays, they can maximize the split gifts benefit and give up to $20,000 directly to each family member.
Another example of a tax-free stocking stuffer is a tuition gift paid directly to an educational institution. If a niece or nephew needs help with school expenses for the spring, tuition can be paid directly to the school to avoid paying taxes on that money.
As with all financial decisions, Tower recommends consulting with an accountant or other knowledgeable professional before wrapping up any financial commitment this holiday season.
“With the proper planning and forethought, you can make wise decisions about your personal finances while placing a generous gift under the tree,” he says. “Giving is especially gratifying when you know you’ve made the best choice for your money.”
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