Charitable giving is worthwhile for many intangible reasons. But why not give in a manner that also brings tangible benefits to you and your family? An outright gift usually yields an income-tax deduction and nothing more. But planned gifts can offer tax advantages while letting you continue to benefit from the donation.
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Planned Giving to Benefit Both You and Charity
February 26, 2012 by ·
The Best Gifts for Grads
July 30, 2011 by ·
You’ve seen momentous changes in the life of your son or daughter. You helped them take their first steps and learn to ride a bike. Now they’ve graduated from college and “officially” entered adulthood. What makes a good graduation or house-warming gift? You can’t go wrong with solid financial advice, particularly this summer, when jobs are scarce.
Give Them a Guiding Philosophy
One sure way to build net worth over time is to live below your means. Of course, spending less than you make is easier said than done for young adults. Excess cash in savings and checking accounts can easily disappear.
A budget can help your grad control his or her spending. The best way to track this information is to compile three lists: debt, expenses and earnings. A budget should also allow for some savings, no matter how small. Saving is an important habit to develop at a young age.
Saving money for the sake of saving money is not appealing, but establishing a few short- and long-term goals can lead to success. They make the process of saving money real, giving your son or daughter a way to measure progress, and make the sacrifices of saving easier to accept.
Make the Most of Total Compensation
Salary is not the only form of pay. Equally important are benefits like health, life and disability insurance, retirement plans and paid vacation time. Some companies offer subsidies for education and health clubs and discounts on services or products, including company stock. Encourage your adult child not to leave money on the table!
New workers tend to do one of two things when it comes to taxes—they withhold too much or too little. Teach your grad that withholding too much means the government keeps his or her money interest free—money that could go to a retirement or emergency fund.
Get a Head Start on Retirement
People in their 20s should sign up for their company’s 401(k) or 403(b) plan the minute they’re eligible. Putting money aside for retirement is always a good idea, but an employer’s retirement plan accomplishes far more than simple savings. In addition to the employer’s matching contribution, such a plan teaches new workers the value of “out of sight, out of mind” savings—when money goes into savings before they have a chance to spend it.
Tame the Debt Monster
The two biggest sources of debt among young adults are credit cards and student loans. Generally, student loan payments should not exceed 8-10% of the borrower’s gross monthly income. Help your son or daughter explore student loan consolidation and establish automatic monthly payments from a checking account.
It can be hard to get along without credit cards in this increasingly paperless society, but even a relatively low credit card balance can grow into an unmanageable burden. Encourage your grad to manage credit cards wisely by doubling the minimum monthly payment and making payments on time.
Keep a Lid on Housing
A good rule of thumb for new college grads is to spend about 25% of their income on housing. This includes rent, parking, and utilities. Decisions about where to live can be emotionally charged. Before signing the lease, help your child consider his or her priorities. The more they spend on a place to live, the less they’ll have for their social life, travel, hobbies, and savings. By holding the line at 25% or less, they’ll be better able to fund a down payment on a house someday.
Insurance Is Not an Afterthought
Young adults must find another insurance resource if their employer has a waiting period, if they are unemployed, or if they can’t piggyback on your health plan. Encourage them to research temporary health insurance plans or join a local HMO. If your grad is single he or she may not need life insurance, but auto, renter’s and disability insurance are necessities.
“If Only I Had Done This Earlier!”
As a financial planner, I’ve heard this many times. Here’s your chance for a do-over with your grown children. Help them establish good financial habits from the outset and you’ll help them lay the groundwork for a flourishing financial future.
Be Generous and Smart
July 30, 2011 by ·
Tax-Free Family Gifts
Do you have someone in your family who could use some financial help? Are you able and willing to provide it? Don’t get out your checkbook without first considering the most tax-advantaged way to help. Without research and planning, your generosity could cause you unnecessary taxation. While estate taxes govern taxation on assets after your death, gift taxes govern what you can give away during your lifetime. Let’s examine ways you can help your family without hurting your own finances.
Exclusions and Exemptions
Within current guidelines, you can still give to your family and friends without facing gift taxes—as long as you keep an eye on exclusions and exemptions.
Gift Tax Annual Exclusion – The federal tax law allows you to give up to $13,000 annually (per recipient in 2011) to an unlimited number of individuals—with no tax or reporting obligations.
Gift Splitting – Married couples can gift up to $26,000 (per recipient in 2011) each year using their gift tax annual exclusions.
Lifetime Exemption – The tax law also provides a lifetime gift tax exemption ($5 million in 2011). This allows you to give away as much as a total of $5 million to family and friends over your lifetime without owing any federal gift tax. If you are married, you and your spouse each are entitled to a separate credit. You can use any or all of the credit to offset taxes on gifts, and the amount you have used will not be available to offset taxes on your estate.
This means that gifts made under the $13,000 exclusion will not use up any of your lifetime gift tax exemption. However, any gifts you make over the $13,000 limit per individual, per year, will reduce your lifetime exemption.
Other Options
Beyond those exclusions and exemptions, there are other tax-free ways to help:
Education Savings
Another possibility might be to make tax-free contributions to the 529 college savings plan of a beneficiary. In one year, you may invest as much as $65,000 ($130,000 if you split the gift with your spouse) in a 529 plan. However, that $65,000 will be treated as if it were a series of $13,000 gifts made over five years. As a result, you won’t be able to make any other tax-free gifts to that person during that five-year period.
College Tuition and Medical Expenses
There are no limits on the amount of these expenses you can pay, as long as you give the money directly to the medical provider or the educational institution where the expenses were incurred.
Loans
You can loan money to family members at a lower interest rate than they would have to pay a bank. To avoid gift taxes, it’s important that you follow the required processes and impose the stated interest rate.
Homes
It’s unclear whether letting someone live rent-free in a home you own is considered a “gift” by the IRS, and therefore subject to gift taxes. You could avoid the issue by making them a part-owner in the home.
When to File a Gift Tax Return
A return is generally needed only when you make a gift of more than $13,000 to any person (other than your spouse) in one year. Your gifts can be cash, securities or other property, but as long as their combined value is $13,000 or less per year, per recipient, no federal gift tax applies and you don’t have to file a gift tax return.
Under current law, you won’t have to pay federal gift tax until all taxable gifts made during your lifetime exceed $5 million. You may want to file a gift tax return for a hard-to-value gift, even when a return is not required. Why? If the transfer is adequately disclosed, the IRS has only three years to challenge the valuation. Without the gift tax return, the IRS could dispute the valuation later when your estate tax return is filed (and justification is much more difficult), potentially forcing your family to pay substantial back taxes.
Generous and Smart
Making gifts while you’re still alive can help your family when they need it most—and if you plan wisely it can also help you avoid or minimize future estate taxes. Your financial advisor can help you make smart decisions to benefit your family and friends, while also keeping your own financial goals and taxes in mind.
Smart Giving: Use Your Head When Making Charitable Donations
January 1, 2011 by ·
The last months of the fiscal year—and the coming winter holidays—make this an excellent time to consider tax-deductible charitable donations. By starting now, you will have time to make smart decisions about your donations, while still ensuring that your giving is done before end-of-year.
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Show Caution with Family Loans
January 1, 2011 by ·
Lending money between family members can be tricky. You may want to help your son, daughter or extended family member start his or her own business, buy a house or finance a college education. But the question always remains–will the social loan be repaid? If you are thinking of making a family loan or asking for one, these quick guidelines may be helpful.
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