Gifts to children and other family members can save income taxes.
The first $14,000 of gifts ($28,000 for married couples who split gifts) made by a donor to each recipient is excluded from the amount of the donor’s taxable gifts. These exclusions can save both transfer tax for the donor and family income taxes. A gift that qualifies for the exclusion is free of gift tax. Estate tax can be saved because both the value of the gift on the date of transfer and post-transfer appreciation (if any) in the value of the gift won’t be included in the donor’s estate.
You must act no later than December 31st to take complete advantage of the annual exclusions. Unused annual exclusions can’t be carried over and are forever lost. If a gift is made by check near the end of the year and the donor wants to take advantage of the exclusion this year, the recipient should be urged to deposit the check before year-end, so that there’s no doubt as to when the gift was made.
Take Advantage of 0% Rate on Investment Income.
Family income tax savings can be realized where income-earning property is given to family members in lower income tax brackets. Once an individual makes a gift of income-producing property to a family member, the income will be taxed to the recipient and not to the donor. If the recipient is in a lower income bracket than the donor, family income tax will be saved. A transfer could also save any 3.8% net investment income surtax (NII) to which the donor is subject.
The federal income tax rate on long-term capital gains and qualified dividends is 0% when your taxable income does not exceed $73,800 for married couples ($36,900 for singles), which is within the 10% or 15% federal income tax rate brackets.
If you are in a higher tax bracket, you may have family members in the 10% to 15% brackets. If so, consider gifting them some appreciated stock or mutual fund shares that they can sell and pay 0% tax on the long-term gains. Gains are considered long-term as long as your ownership period plus the gift recipient’s ownership period (before he or she sells) equals at least a year and a day.
Gifting stocks that pay dividends is another tax-smart idea. As long as the dividends fall within the gift recipient’s 10% or 15% rate bracket, they will be federal-income-tax-free if they are ‘qualified’ dividends.
Warning: If you gift securities (or any income-producing property) to someone under age 24, the Kiddie Tax rules could potentially cause some unwanted tax consequences. Maximum savings will be realized for a gift to a child of the donor only if the child is not subject to the kiddie tax. A child is subject to the kiddie if:
- (1) he is under age 18 at the end of the year, or (2) is age 18 at the end of the year (or a full-time student over age 18 and under age 24), and his earned income for the tax year doesn’t exceed one-half of his support,
- he has more than $2,000 of unearned income;
- the child has at least one living parent at the close of the tax year; and
- the child doesn’t file a joint return for the tax year.
For a child who is subject to the kiddie tax, some of his income may be taxed at the parent’s highest marginal rate, but some savings are still possible.
These are just some of the gift strategies that are available to you.