Gift-Giving Facts Every Financial Advisor Should Know

IMGCAP(1)]With the holidays upon us and tax season almost here, now is the perfect time to check in with your clients to discuss their gift-giving plans for the rest of the year.

Whether the main purpose of the giving is to help family members and friends, tax and financial planning, or philanthropy, each client’s goals and the tax implications should be evaluated before any action is taken. Here are some tips and reminders:

Gifting to Family and Friends
Each year, an individual may gift up to the Annual Exclusion amount of their own property to as many people as they choose. For 2014, your single clients can give up to $14,000 per person, and your married clients can give up to $28,000 per person ($14,000 each) without affecting the lifetime gift tax exemption of $5.34 million dollars (the limit is raised to $5.43 million for 2015).

For married couples the gift-splitting election is an option even if the gift is given by one spouse only. Gift splitting requires the consent of the non-giving spouse and may require both to file a gift tax return, although the gift-splitting election generally is not necessary in community property states.

The gift tax rules apply to any “present interest” gift. A gift is “present interest” if the recipient of the gift has full, unrestricted rights to the gift immediately. Gifts can include property, or selling property to someone for less than its fair market value. If the gift is a “future interest” gift, then it is not subject to the Annual Exclusion, and it is a taxable gift.

The timing of gift-giving is important. To count as a gift given during this year, the gift must be completed by December 31. When a gift is considered to be completed can be different depending on the type of gift. In general, it means the giver has given up control of the property and no longer has the power to change its beneficiaries. A cash gift in the form of a check is considered complete when the check is deposited into the recipient’s account. A gift of stock is complete when the securities have been transferred into the beneficiary’s account.

Gifts to a spouse who is a U.S. citizen do not fall under the gift rules. Under the marital deduction a gift passes to the spouse tax free, regardless of the amount of the gift. This rule now includes lawfully married same-sex couples.

Direct payments your clients make on behalf of another person (who does not have to be related to the giver) for tuition, dental or medical expenses do not fall under the gift tax rules, provided the payments are made directly to the school or medical provider. No gift tax return is required, and there is no dollar limit. The tuition can be paid for primary, secondary or post-secondary education.

Gifting for Tax and Financial Planning
Gifting up to the Annual Exclusion amount can allow your high net worth clients to reduce their future estate taxes since the gifts take money out of their estate without affecting the lifetime exemption. And, while not deductible to the donor, they are not taxable income to the recipient. Some of your clients may have concerns about giving up control of their property when a gift is made. Therefore it is generally a good idea to discuss this aspect with clients before they make the gift.

Gifting highly appreciated assets to a family member in a lower tax bracket can be an effective tax-saving strategy for the family as a whole. The beneficiary receives the donor’s basis in the asset and should pay much less in tax when the asset is sold.

Generally, it is not a good idea to advise clients to gift stock that they are currently holding at a loss; in most cases it would be more beneficial to sell the stock and gift the money. Remember that under the kiddie tax rules, the investment income of children under age 18 and full-time students under 24 who do not provide more than half of their own support will be taxed at the parents’ highest tax rate if the investment income exceeds a threshold amount.

Gift Giving as Philanthropy
Charitable giving falls under the income tax system; therefore, completed gifts of any amount to qualified charitable organizations do not require a gift tax return but are deducted on the income tax return, subject to limitations.

Political contributions are unique. They are not tax deductible, but neither do they fall under the gift tax rules. Both charitable and political contributions remove cash assets from the estate without decreasing the lifetime exemption.

If you have clients who are inclined toward both charitable giving and planning to sell stock or property that would incur long-term capital gains, they may be better off if they donate the stock or property rather than making charitable gifts in cash. Generally, a taxpayer is allowed to deduct the full fair market value of stock held long term when it is donated. This allows the taxpayer to not only avoid paying the capital gains taxes, but also receive a full tax deduction. And if your client is subject to the Alternative Minimum Tax, this reduces their adjusted gross income, and charitable giving is not an AMT adjustment item.

Charitable gift donations are deductible in the year donated, even if the check is not cashed before the end of the year. A donation by credit card qualifies, provided the transaction is completed before the end of the year; payment of the credit card bill is not a requirement.

End of Year
Whether your client’s goals are income tax deductions or reduction of the taxable estate, or both, making the proper moves before the end of the year can help them in the accomplishment of these goals.

Dave Du Val is vice president of customer advocacy at TaxAudit.com. He is an Enrolled Agent and federally authorized tax practitioner who has prepared thousands of returns during his career and has trained and mentored hundreds of tax professionals. He is a member of the National Association of Tax Professionals, the National Association of Enrolled Agents and the California Society of Enrolled Agents. He also holds a Master of Arts in Education and has been educating people since 1972.

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Tax practice Tax season Estate planning Tax planning Wealth management
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