The holiday season is upon us and 2017 is right around the corner. In all of the holiday hustle and bustle it is easy to forget or skip a few items on your to-do list. One thing you should be sure to get done before the end of the year if you are committed to passing on as much of your wealth as possible to the next generation without getting hit by a huge tax bill, is gift giving.
Gifting Is A Great Idea
Uncle Sam taxes pretty much everything, but you have probably noticed that one thing he doesn’t tax you on are gifts that other people have given you. This makes sense because the government doesn’t want to discourage generosity or have the burden of keeping tabs on the gifts exchanged at everyone’s holiday celebrations. But the government also wants to make sure people aren’t using gifting as a way to avoid paying estate taxes, so the government has found a middle ground. It taxes the giver who gives a person other than their spouse gifts worth more than $14,000 per year.
This means you can gift as many people as you like $14,000 per person per year without paying any taxes. If you are married, your spouse can chip in $14,000 per person per year as well, bringing the total tax free gift you can make per person per year up to $28,000.
Things To Keep In Mind
While $14,000 or $28,000 per year may be a small amount compared to all you hope to pass on, if gifted year after year, it starts to add up. And there are things you can do to make an even larger tax free gift. If a person you want to give money to is in school or has medical expenses, you can pay their educational and medical bills and that will not count toward your annual gift tax exemption so long as the money is given directly to the organization.
It is important to remember that cash is not the only thing that counts toward the gift tax. If you plan on gifting your grandchild a car for their birthday, graduation, or just because, the value of the car counts toward the annual exemption. If you are gifting a car worth more than $14,000, or $28,000 if you are married and gifting jointly, you are going to be taxed on the amount over the cap. And it is critical that you remember not to do an annual gift tax gift to the grandchild you gave a car to unless you want to pay tax on it.
If you are uncomfortable gifting cash or other items to someone, say a small child, consider setting up an irrevocable trust naming them as the beneficiary and gifting to it instead. So long as the trust is irrevocable, this works just as well as an outright gift for avoiding taxes.
Don’t Forget Charity Gifting
If you are looking to lower your tax burden for 2016 as well as your estate taxes, don’t forget to donate to some worthy charities before the end of the year. You are going to have to part with the money no matter what, so why not see it go to a charity you appreciate the work of rather than the government’s coffers?