By Lewis J. Walker
NEW YORK (AdviceIQ) — Tax strategies are key elements of financial planning. When sharing your fortune with someone else, no matter how you accumulate it, you should understand the tax implications so your good intentions don't come back to bite you.
In wishing to share wealth, family often tops the list. You can gift unlimited assets to a spouse who is a U.S. citizen free of gift taxes. For a spouse who is not an American citizen, the gift tax exclusion for 2014 is $145,000 after tax. For gifts to children or other non-spousal beneficiaries, the 2014 annual gift tax exclusion is $14,000. A couple can give $28,000 combined. You make gifts with after-tax dollars. Parents, grandparents or other relatives often use the annual exclusion to fund college savings plans.
You may contribute up to $14,000 per child, or $28,000 jointly to a 529 college savings plan. Suppose you had a windfall or inheritance or you wished to lower your taxable estate. You may give up to five years worth of annual exclusions up front to a 529 plan or $70,000, per person or $140,000 per couple, per child. "Front loading" the plan for a younger child has advantages. The money grows free of tax and longer timeframes allow equity-based accounts to ride through market ups and downs, generating growth to offset educational inflation.
Costs for K-12 private schooling, college and post-graduate educations are rising. Can a grandparent or other relative help in other ways? Under the educational exclusion, you can make payments directly to a qualified domestic or foreign institution for tuition free of gift tax. You could pay a granddaughter's tuition of $30,000 and still give her $14,000 under the annual gift tax exclusion.
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Payments must be only for tuition and be paid directly to the institution, not to the student. If you pay for books, supplies, computers, summer study trips abroad, to the extent that the non-tuition items exceed $14,000 the excess is a taxable gift. Again, two persons may combine gifts up to $28,000.
Some parents struggle with medical expenses for children with costly issues. Under the medical exclusion, payments made to a medical provider are free of gift tax. You must pay the provider directly, not the parents or the patient. For example, you may pay for a child's emergency surgery or other treatment and still donate $14,000 to a 529 Plan free of gift tax.
For gifting to religious institutions and other charities, high-tax-bracket givers should coordinate with their accountant, given the complexity of our arcane tax laws. Starting last year, a 3.8% surtax was applied to unearned income over certain thresholds, which can increase the federal marginal long-term capital gains tax rate to 23.8% plus applicable state and local levies. Better to transfer low tax-basis stock directly to the charity and avoid the capital gains tax and surtax, while taking the charitable deduction based on the current value of the stock, not what you paid for it.
A limitation on itemized deductions, including charitable deductions, took effect last year. The phase-out limitation reduces the amount of deductions a high-earning taxpayer — for example, $300,000 for married couples filing jointly and surviving spouses — can take by 3% of adjusted gross income above specified thresholds, not to exceed 80% of the affected deductions. Planning for tax-wise moves with your financial adviser and accountant should start now. Don't wait for the fourth quarter rush.
We all have time, energy and creativity that can be a powerful force for change. Think Mother Teresa. If you give time and talent to a cause, you may deduct 14 cents per mile for driving your car in service to a religious institution or other charity. Best to keep a log detailing activity. Keep receipts for any goods donated, including purchases to refill food pantries and soup kitchens.
Winston Churchill is purported to have said, "We make a living by what we get. We make a life by what we give." If you know the right tax planning strategies, you are able to give more to the people you love and the causes you support.
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Lewis Walker is president of Walker Capital Management in Peachtree Corners, Ga., with securities and certain advisory services offered through The Strategic Financial Alliance Inc. Lewis Walker is a registered representative of The SFA, which is otherwise unaffiliated with Walker Capital Management. Reach him at (770) 441-2603 or at email@example.com.
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