Tax Savvy Children Gifts
- Gifting appreciated stock may make more sense than gifting straight cash since shares of stock increased in value from the time the taxpayer first purchases them. Additionally, gifting stock is a good way to help a child learn about stocks. However, taxpayers should be wary of the fact that the current 15% capital gains tax is set to increase to 20% unless the law is changed. If the child is younger than 18 or is a full-time student under age 24 with little earned income, the student will pay no tax on the first $950 of income per year and the following $950 gifts are taxed at their tax rate each year. Parents will have to pay kiddie taxes on gifts over $1,900 in investment income.
- Taxpayers considering making large gifts should be wary of the current gift law limits. Every taxpayer can currently give up to $13 thousand to as many people as they wish each year without incurring a gift tax. Any gifts given over this amount will reduce the taxpayer’s total lifetime gift and estate tax exclusions.
- Tax-advantaged educational savings options are another options taxpayers have when gifting to children this year. If a taxpayer contributes his gift to a 529 savings plan, the taxpayer will avoid gift tax and potentially income taxes on the gift’s future earnings. These accounts allow earnings to grow tax-free if the taxpayer uses the assets for post-secondary education. Taxpayers can also front-load up to five years of gift-tax exclusions, meaning they can contribute up to $65 thousand (or $130 per couple) per child each year.
See Liz Davidson, 3 Tax Savvy Gifts for Children, Forbes, Dec. 21, 2011; Shahzeb Gaziani, Tax Free Christmas Gifts, Wealth Strategies Journal 2.0 (Beta), Dec. 23, 2011.
Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention.
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