The holidays are upon us, which means that it’s time, once again, to search for those "perfect" gifts. This year, why not add financial gifts to your shopping list? They can make a big difference in the lives of the people you care about.
What types of financial gifts should you consider giving? Let’s look at a few possibilities:
- Contributions to Section 529 plans – If you have a child (or grandchild) that will be headed off to college in a few years, you may want to contribute to a Section 529 college savings plan. Your contributions may be tax deductible if you are participating in your own state’s plan. Plus, your earnings and withdrawals will be exempt from federal taxes as long as the money goes toward paying college costs. (However, withdrawals used for expenses other than qualified education expenses may be subject to federal, state and penalty taxes.)
- Contributions to an IRA – If you know a loved one has an IRA, consider making a contribution. Many people don’t fully fund their IRA each year – so any help you can give toward that goal will be important.
- Stocks – Consider giving shares of a company that produces products or services that are used by your intended recipient. If you’re going to give away some of your own shares, you’ll need to know what you originally paid for the stock, how long you’ve held it and its fair market value at the date of the gift. Recipients of your gift will need this information to determine gains or losses if they decide to sell the stock. You’ll also need to determine if you have to pay gift taxes. You can give up to $12,000 per year, free of gift taxes, to as many people as you want; over your lifetime, you can give up to $1,000,000 without incurring gift taxes.
- Zero-coupon bonds – These types of bonds can make nice gifts if you know that your intended recipient would like to achieve a specific financial goal – such as a new car, a dream vacation, etc. – in a given number of years. You buy a zero-coupon bond – usually issued by the Treasury under the name of STRIPS – at a deep discount; when the bond matures, you – or in this case, the recipient of your gift – collects the full face value. In other words, the accrued interest is paid at maturity, so you – or the recipient – won’t receive periodic interest payments. Keep in mind, however, that these "phantom" interest payments will still be taxed as ordinary income each year until the bond matures. Also, market prices of zero coupon bonds tend to be more volatile than bonds that pay interest regularly.
- Charitable gifts – You may want to make a financial gift to an organization in the name of a loved one – especially if this person is an enthusiastic supporter of the charity. Your generosity will be appreciated, and you’ll get some significant tax benefits. First, you may get an immediate tax deduction for your gift. Second, you’ll avoid paying capital gains taxes by donating appreciated assets, such as stock or real estate. And third, you’ll be removing an asset from your taxable estate.
A financial gift can brighten a loved one’s holiday season – and your thoughtfulness will be felt long after the holidays are over.
Reprinted with permission – www.eurweb.com