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Leaving a Legacy and Gifting your Heirs Today

By January 30, 2020February 4th, 2020Tax Advice

When it comes to gifting, it may make more sense to do it now than wait until later. Gifting an heir now, rather than at the time of your death, can benefit you when it comes to tax time. Enjoy the lifetime exemption for an estate tax exemption when you give a gift. Giving away monetary gifts now reduces what you can transfer tax free when you die.

Planning to give someone a gift? Here’s what you should know:

There are Limits

There is a maximum amount of tax-free gifts that you can give in a year, set by the Internal Revenue Service (IRS). For instance, in 2015, the maximum gift was $14k per person, though you can gift as many people as you wish up to this amount. These gifts are tax free.

Some Gifts are Exempt

If you are gifting money for Medical, dental and/or tuition expenses, these may be exempt from the $14,000 gift-giving limit. If you want these types of gifts to be tax exempt, you must pay the practitioner of services directly. While tuition expense gifts are exempt, this is not the case for books, supplies, or room and board, which may count toward the maximum gift cap.  This also extends to medical bills that are reimbursed by health insurance coverage and reimbursed later; these are not exempt and fall under the cap guideline, too.

Give with a 529 College Savings Plan

Contributions to state-sponsored 529 plans are tax free when the money is pulled out for educational related expenses, though they are not exempt from the gift tax limit. Consider longer term gifting to beef-up the college savings plan while sticking to the gift limit with the goal of providing a nice college nest egg to your heir in a few years. Know that students with 529 college accounts may be ineligible for certain types of financial aid; talk to an admission representative or your financial planner to learn more.

Know About the Kiddie Tax

The Kiddie Tax law was formed to prevent parents from transferring stocks to their children to avoid having to pay taxes on their portfolio. The law protects children under the age of 24, and if the gifted shares exceed $2k, the parents are taxed on it.

Tax laws change regularly, and tax time may become complicated; do yourself a favor and meet with a qualified financial planner in the area who has familiarity with estate planning and tax preparation. Leaving something behind for your heirs is more than a gift, it is often a legacy. Talk to someone with financial information and insight that can help advise you, ideally before giving gifts to anyone at all.