All I Want for Christmas Is… CASH!

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Cash Gifts and the IRS

By: Gelasia Steed, CFP®

Santa baby, slip a little envelope under the tree for me! Nothing says “I love you” like a hunk of cash to buy what you want when you want it. In fact, you probably already bought yourself several little gifts while Christmas shopping. No returns. No fake smiles. Cash (or check) makes the perfect gift and it is so easy to give – or is it?

Unfortunately, lurking behind your tree is the mean and nasty Scrooge IRS ready to levy 35 percent gift tax on you if you are too generous this year! How can you avoid the Scrooge and still fill your family with joy on Christmas morning?

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Stay under the max. Each year, you can give away cash, property and gifts – without being taxed – as long as those gifts are below the annual gift tax exclusion amount. The 2010 annual gift tax exclusion amount is $13,000 per person to as many friends and family as you would like to give, and if you’re married, it’s doubled! You can make my check out to CASH.

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Scrooge counts all gifts given. Diamonds are also much appreciated, but still subject to $13k annual exclusion.

Keep it under $1 million. Scrooge lets you gift up to $1 million total (not per person) over your lifetime above the annual exclusion.

Spoil your spouse because marital gifts are unlimited. All she wants for Christmas is… jewelry, because she’s already got you!

Make sure it is a present interest gift. Can I have it now please? But wait, there are many exceptions:

  • You can gift some things up to 5x the annual exclusion if you promise not to give anything for 5 years. Hint: A brand new car or a contribution to your grandchild’s 529 college savings plan which is considered a completed gift even though he or she is not heading to college this year.
  • Be careful about gifts that you retain control over because Scrooge is onto you and might not consider it a completed gift. Scrooge thinks it’s still in your estate.
  • Trust rules are tricky, but are meant to protect the minor from squandering his wad on video games. Trusts that distribute income, expire at 21 years of age or allow the minor to access the money for at least 30 days are considered completed gifts – get the specifics from a trusted financial adviser.

Watch out for unintended gifts like interest-free loans. That forgone interest is considered a gift in Scrooge’s ledger.

Die in 2010 to avoid the estate and generation-skipping transfer (GST) taxes. Perhaps you should cook the Christmas goose yourself this year! But watch out, because on January 1, 2011, estate and GST taxes will be back in full force. Although, Congress and the President are filled with the Christmas spirit working on a deal to return the estate tax to 35 percent with $5 million exemption opposed to 55 percent and $1 million dollar exemption.

Pay it directly. Medical bills and school tuition can be paid directly to the provider and not be subject to gift exclusion.

There are so many more rules, but this should help you avoid Scrooge and have a Merry Christmas!

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Gelasia Steed is a Certified Financial Planner™ professional  licensed with a registered investment adviser who provides  personal financial advice online for a fee. She enjoys skiing, scuba diving and entertaining friends. Contact Gelasia for help with virtually any financial advice need.

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