4 Tax-Efficient Ways to Gift Money This Holiday Season

Few people think about the holidays without thinking about the word "gift." 

Most often, the word “gift” is associated with what you find in your stocking or under a tree after waking up Christmas morning. 

I often make the joke that Christmas presents get boring as I grow older because rather than asking for the new gaming console or my favorite player’s jersey, I’m asking for the little things: socks, gift cards to my favorite restaurants around town, etc.

However, I’ve also found myself asking for one big thing every year. That big thing being a little bit of money to invest, with the intention that I can one day use it to put a down payment on a house, buy my significant other a wedding ring (who, don’t get your hopes up, is not in the picture yet), or help pay for living expenses so that I can contribute additional money to my 401(K). This life transition is something I think we can all relate to as we grow older.

We see many of our clients gift in ways that can help provide for future generations and act as a short-term strategy that supplements their long-term estate planning goals. So, let’s take a look at some things you should be thinking about if you have additional money you would like to gift at the end of the year.

Gifting if You Are Over Age 70 ½ - Qualified Charitable Donations

If you’re over 70 ½, giving to charity directly from your IRA is one of the most tax-advantaged ways to meet charitable goals as it both counts toward your required distribution for the year and does not show up as income on your tax return. Rules You Need to Know to do an IRA Qualified Charitable Distribution

Tax-Efficient Gifting Strategies

Gifting if You Are Under Age 70 ½ - Bundled Deductions and Donor Advised Funds

Though not as tax advantageous, people under 70 ½ who feel charitably inclined should consider bundling deductions through a Donor Advised Fund, especially since the standard deduction is now quite a bit higher.  Bundling Deductions and Tax Savings: How to Take Advantage of Your Deduction Options

Gifting to Help Financially Support Future Generations

More often than not, people want to take care of the next generation and one day, the generation after that. Let us assume your loved one has children in the first few years of their career. It is likely that they are using most, if not all of their take-home pay for rent and living expenses, and are likely not maxing out their savings for retirement. You may consider talking to them about how they can use the money you gift as a proxy for their salary to fund the aforementioned living expenses and defer an amount close or equal to the sum of the gift toward their employer retirement plan. Maximizing the next generation’s ability to save in tax-deferred accounts like 401(k)s, Roths, and IRAs can be one of the best estate planning tools available.

Many years later, these individuals will most likely have stabilized financially and hopefully have the ability to fund their retirement and more.  Around that same time, they are probably looking to have children (meaning grandchildren for you). One of the ways to best assist with the new parents’ cash flow is by opening and contributing to a 529 plan for one’s grandchildren. The earlier, the better, as 529s act like a Roth in that they grow tax-free. Thus, your annual gift has reduced the burden of one generation’s cash flow while simultaneously afforded the next generation a greater chance of going to college and graduating with little to no student loan debt.

As we always tell our clients, it’s your money, and you choose how you want to spend it or gift it. If you want to gift your children the cost to cover a kitchen renovation or a new car, there is nothing wrong with doing so. This article serves not a guide on how you should make generational or charitable gifts, but an outline of how you can make these gifts in a way that is most tax beneficial. For more information regarding tax-efficient gifting strategies, contact your advisor, or reach out to the Willis Johnson & Associates team.

Willis Johnson & Associates is a registered investment advisor. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein. Insurance products and services are offered or sold through individually licensed and appointed agents in various jurisdictions. 
Bobby Cope, MS, CFP®

Bobby Cope, MS, CFP®

Robert (Bobby) Cope joined Willis Johnson & Associates as a financial paraplanner in May of 2017 after recently graduating from the University of Alabama. For Bobby, entering the financial planning profession allows him to both assist the associate wealth managers of the firm in handling daily operations, and, more importantly, assist clients in various facets of their lives as they prepare for retirement.