Last Week’s Question of the Week: Beginning in 2020, at what age must you begin taking RMDs…is it age 62 or age 72?
ANSWER: You must withdraw your RMDs from your tax-deferred accounts each year after reaching the age of 72.
HOST: As we discuss saving for our retirements, what should we know about gifting?
KLAAS FINANCIAL: Great question! We get this question a lot as parents often want to help their adult children. We are not accountants, but we are very familiar with such topics. We always suggest that you confer with your accountant when you do decide to gift.
First of all, let’s define what is considered a gift: The IRS considers any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return. The general rule is that any gift is a taxable gift.
- Gift Tax Exclusion for federal gift tax purposes is currently $15,000 in 2020, which was the same in 2019. That means that you can gift $15,000 per person to as many people as you want with no federal gift tax consequences, if you split gifts with your spouse, that total is $30,000 per person.
- Federal gift max: In your lifetime, (in 2020) the max you can give is $11.58 million to heirs (same figure as the Federal Estate Tax Exemption) and pay no federal estate or gift tax, while a married couple will be able to shield $23.16 million.
- There are no tax savings for the giver, and usually no taxes to be paid by the recipient.
- Making a gift or leaving your estate to your heirs does not ordinarily affect your federal income tax. You cannot deduct the value of gifts you make (other than gifts that are deductible charitable contributions).
HOST: So, if I gift money to someone, will I have to pay a gift tax?
KLAAS FINANCIAL: The donor is generally responsible for paying the gift tax (if there is one, which is unlikely). Under special arrangements the donee may agree to pay the tax instead.
What can be excluded from gifts? The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule. Generally, the following gifts are not taxable gifts:
- Gifts that are not more than the annual exclusion for the calendar year. ($15k per individual)
- Tuition or medical expenses you pay for someone (The educational and medical exclusions).
- Gifts to your spouse. (If they are a U.S. citizen)
- Gifts to a political organization for its use.
- Remember that gifts to your children are not tax deductible.
HOST: So why should we consider gifting to our children? And what types of gifts should we consider?
KLAAS FINANCIAL: We like to remind our clients that it is really nice to give and see a gift given while you are living, and also because your adult children who are possibly in their late 30’s, 40’s or early 50’s are likely to welcome/need assistance now, more than when they are in retirement. Here are some ideas of how you may like to gift:
Create a gifting strategy: If you have enough resources to take care of your needs during your lifetime, giving assets to your children could be helpful from an estate planning perspective and can have a large impact on the quality of life for your heirs. For many young people receiving an annual $30,000 gift has the potential to be a life-changing sum of money. You may want to consider giving a smaller amount first and observe how they handle this responsibility. If they do well with that, you might consider increasing your gift the next year.
Family vacations: Consider renting a vacation home and paying for the vacation every other year.
Retirement accounts: Help make contributions to your children/grandchildren’s retirement accounts as soon as they have taxable earned income. The annual contribution limit to a Roth IRA is currently $6,000 a year for those under 50. You/they can contribute $6,000 annually or 100% of their earned income, whichever is less.
Education and Medical Expenses: One exception to the $15,000 annual gifting limit is that you can give an unlimited amount to your children for tuition or medical expenses. Education and retraining can be an excellent way to help make your children more self-sufficient. Additional training, certifications, or degrees have the potential to make them more employable or may help them to earn more in their current job. Here are some rules to keep in mind:
- The money must be paid directly to the educational institution or the medical provider and not go to the child first.
- Helping to pay off student loans would not count for the exception unless you were a co-signer on the loan despite the fact the debt was originally incurred for tuition.
- Medical expenses can be a real burden, especially early in life. You can help reduce that burden by paying those expenses and not be subject to the annual limit.
When contemplating how much to gift to your kids, keep in mind the advice of Warren Buffett who says you should give your kids “enough money so that they would feel they could do anything, but not so much that they could do nothing.”
HOST: Todd from our Money in Motion Listener Corner asks: “Someone I work with was telling me about the Rule of 72. Can you explain how this actually works, or does it even work?”
The Rule of 72 is a simple way to determine how long an investment will take to double given a fixed or suggested annual rate of interest. By dividing 72 by the annual rate of return, investors obtain a rough estimate of how many years it will take for the initial investment to duplicate itself.
For example, the Rule of 72 suggests that $1 invested at an annual fixed interest rate of 10% would take 7.2 years (72/10 = 7.2) to double or grow to $2. If you are anticipating an 8% rate of return, divided into 72, that would mean that your investment would double in 9 years. The Rule of 72 is reasonably accurate for low rates of return.
This Week’s Question of the Week: According to the IRS, how much can an individual gift to another person in 2020 without federal gift tax consequences? Is it $5000 or $15,000?
Catch C.J. Klaas and Maleeah Cuevas on Money in Motion every Thursday on Madison's 1310 WIBA from 8:05-8:35am.