Chris Perry, CFP®, CTFA, Wealth Advisor
Cue David Bowie’s 1972 hit song, Changes. You are probably familiar with the opening lyric of the chorus; “Ch-ch-ch-changes.” You may not be familiar with the rest of the lyrics and that’s perfectly fine because they don’t make a lot of sense and they are in no way relevant to the topic of the IRS changes to gifting amounts for 2022. This was all just an elaborate set up to let you know that there are ch-ch-ch-changes happening for this year and that you can take advantage of them in your financial plan.
To understand what the changes to gifting can mean for you and your plan, let’s first explore what gifting is when it comes to financial planning. The IRS definition of gifting is the same as the dictionary definition of gifting. It is the act of giving something without the intention of receiving anything in return. So what does that mean for you and your financial plan? Should you be tracking the money you put in your children/grandchildren’s birthday or graduation card? The simple answer is no unless you are putting thousands of dollars in a card. In that case, please remind me to invite you to my next birthday!
The new IRS rule allows for gifting up to $16,000 annually without having to file the amount on a tax return. That amount is up $1,000 from the previous year so if your financial plan includes some planned gifting be sure to adjust accordingly to take full advantage of the new provision. Please note that this means $16,000 for each member of the household. So a husband and wife could each make a gift of $16,000 to a loved one.
The Benefits of Gifting
The benefits of gifting are twofold. First, it can be a great efficiency strategy to reduce taxable assets when estate planning. Reducing the taxable assets can reduce the burden of estate tax to be paid out upon passing of the assets to a beneficiary. If you are financially able to gift, it can also get the assets into the hands of your beneficiaries sooner and you can enjoy the benefit of seeing them enjoy it. The recipient of the gift can receive up to $16,000 without being taxed. If you want to see your children or grandchildren benefit from a gift but don’t know that a sudden influx of cash would be a healthy thing for them, you can also consider gifting to benefit a 529 plan to support their future education or a UTMA for greater flexibility in transferring funds to a minor. There are two important points if you are considering gifting as part of your financial plan. First, you don’t have to have $16,000 to get started in gifting. That number represents the limit before taxes can be assessed, not the minimum threshold to get started. Second, you do have to make sure that your financial needs are met before you begin gifting. All parents want the best for their children and that is what makes gifting an enticing option but if the gifting happens at the expense of your own financial needs, it can be more of a burden than a benefit. Many retirees have seen their investments grow as of late and their assets are greater than they need to maintain their quality of life. If your pension and social security cover your living expenses, gifting is a great option to spend down the overage in savings and to further a legacy.
Gifting Cash vs. Gifting Investments
Traditional beliefs held that gifting investments was the best way to set beneficiaries up for future financial stability because they benefited from the growth of the investments. While there is truth to this and none of us would be upset if we had some early Disney or Amazon stock in our portfolio, the major consideration in this form of gifting is tax efficiency. There are no taxes to be paid out on the transfer of assets but the beneficiary is taxed on the growth of the assets. Transferring investments has tax implications so please consult with your tax professional before making the decision.
Anchor Wealth believes in focusing on money’s purpose in our client’s lives rather than solely on its performance. Gifting can be a great way to create a tax-efficient financial plan while fulfilling your purpose through money. If you would like to add gifting to your comprehensive financial plan, reach out, and let’s get started.