Updated: May 10
The Gift Tax rules are interesting and offer many possibilities for planning that will improve the quality of life for your family and friends. Basically you can give total cash gifts (checks) of $14,000 each year, to each person. If you have three grandchildren, you can give each of them $14,000 total gifts in 2016 and there is no gift tax to pay and form 709, U.S. Gift Tax Return is not required to be filed. That is known as the “Annual Exclusion” gift allowance. In addition to the cash gift, you can pay the medical or education provider directly for that person and it is still an “Annual Exclusion” gift. That is if they have a hospital, doctor, dentist or other medical bill, you can pay it directly to the medical provider for their account and it is still not a taxable gift. If you pay the college or university directly for that person, that also is an “Annual Exclusion” gift. It does not matter the tuition to Harvard might be $58,000, it is not a taxable gift. Some grandparents have made smaller gifts to various grandchildren (or children or great grandchildren) to encourage a savings habit. If your grandson has wages earned in 2016 of $5,500, you could consider doing a gift of that amount with the strong suggestion it be contributed to a ROTH IRA by the grandson. If the grandson only earned $2,000 in wages (and/or self employed business profits) then the maximum ROTH IRA for 2016 for him would be $2,000. The grandson must have ‘earned income’ to qualify for doing a contribution to an IRA account (ROTH or regular). If the money in the ROTH IRA was invested in good, big company common stock, the accumulation of dividends and growth in value will be significant by the time the grandson is age 59 1/2 . That is the time to be able to withdraw without a 10% early withdrawal penalty. But, since the tax laws are complicated, he could withdraw up to $10,000 to help buy his first home without the 10% early withdrawal penalty. Or, if he has special medical problems or one of the other qualifying situations, he might be able to withdraw some of the accumulation without the 10% penalty. See form 2210 instructions and the related IRS publications for details. We urge clients to do a “love letter” when making special gifts. The letter can say how much you love them, why and how you are proud of them-and always will be. A person who received a gift with a love letter told me the letter was a greater gift than the money! Did you hear “Since we live longer now than in 1776, it would be appropriate to have a ten year term limit for our U.S. Supreme Court Justices”.