Winston Churchill observed, “We make a living by what we get. We make a life by what we give.” Tax strategies are key elements of financial planning no matter how we accumulate assets, whether earned income, investment income or gains, inheritance, or winnings. How we share our good fortune with others also has tax implications.
In wishing to share wealth, family often tops the list. You may gift unlimited assets to a spouse who is a U.S. citizen free of gift taxes. For a spouse who is not an American citizen, the gift tax exclusion for 2014 is $145,000.
For gifts to non-spousal beneficiaries such as minor or adult children, the 2014 annual gift tax exclusion is $14,000. A couple can gift $28,000 combined. Gifts are made with after-tax dollars. The annual exclusion often is used by parents, grandparents, or other relatives to fund college savings plans.
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You may contribute up to $14,000 per child, or $28,000 jointly to a 529 College Savings Plan. Suppose you had a windfall, inheritance, or you wish to lower your taxable estate. You may gift up to five years worth of annual exclusions up front to a 529 Plan, $70,000, per person or $140,000 per couple, per child. “Front loading” the plan for a younger child has advantages. The money grows free of tax and longer time frames allow equity-based accounts to ride through market ups and downs, generating growth to offset educational inflation.
Costs for K-12 private schooling, college, and post-graduate educations are rising. Can a grandparent or other relative help in other ways? Under the “educational exclusion” payments may be made directly to a qualified domestic or foreign institution for tuition free of gift tax. One could pay granddaughter’s tuition of $30,000 and still give her $14,000 under the annual gift tax exclusion. Payments must only be for tuition and be paid directly to the institution, not to the student. If you pay for books, supplies, computers, summer study trips abroad, to the extent that the non-tuition items exceed $14,000, the excess is a taxable gift. Again, two persons may combine gifts up to $28,000.
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Some parents struggle with medical expenses for children with costly issues. Under the “medical exclusion,” payments made to a medical provider may be made free of gift tax. You must pay the provider directly, not the parents or person receiving the medical treatment. For example, you may pay for a child’s emergency surgery or other treatment and still donate $14,000 to a 529 Plan free of gift tax.
For gifting to religious institutions and other charities, high tax bracket givers should coordinate with their CPA given the complexity of our arcane tax laws. Starting in 2013 a 3.8% surtax is applied to unearned income over certain thresholds, which can increase the federal marginal long-term capital gains tax rate to 23.8%, plus applicable state and local levies. Better to transfer low tax-basis stock directly to the charity and avoid the capital gains tax and surtax, while taking the charitable deduction based on the current value of the stock, not what you paid for it.
A limitation on itemized deductions, including charitable deductions, took effect in 2013. The phase-out limitation reduces the amount of deductions a high-earning taxpayer, e.g., $300,000 for married couples filing jointly and surviving spouses, can take by 3% of Adjusted Gross Income (AGI) above specified thresholds, not to exceed 80% of the affected deductions. Planning for tax-wise moves in concert with your financial advisor and CPA should start now. Don’t wait for the 4th quarter rush!
We all have time, energy, and creativity that can be a powerful force for change. Think Mother Teresa. If you gift time and talent to a cause, you may deduct 14 cents per mile for driving your car in service to a religious institution or other charity. Best to keep a log detailing activity. Keep receipts for any goods donated, including purchases to refill food pantries and soup kitchens.
Demands for help are rising, but with planning your response can be less taxing!
Lewis Walker is President of Walker Capital Management, LLC. Certain advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis Walker is a registered representative of SFA which is otherwise unaffiliated with Walker Capital Management, LLC. lewisw@theinvestmentcoach.com