Money Matters
abrewer5
member
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Our tech team has launched updates to The Nest today. As a result of these updates, members of the Nest Community will need to change their password in order to continue participating in the community. In addition, The Nest community member's avatars will be replaced with generic default avatars. If you wish to revert to your original avatar, you will need to re-upload it via The Nest.
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Note: This only affects The Nest's community members and will not affect members on The Bump or The Knot.
Taxes on Gifts?
Happy Friday!!
I'm planning to open a savings account for my niece who turns a year old in a few days as part of her birthday gift. The goal is to put $50 in it for Christmas/birthdays and $25 for Easter. I'd also start an allotment for $5-10 a pay check to go in there. I would then gift her the balance of the account when she turns 21 (if she's responsible enough at that point). Roughly $5000-8000 depending how much I contribute every pay check.
I'm wondering if anyone can tell me if I would screw her (or myself) with taxes by doing this? I'd hate to be saving all this money for her and then find out she has to pay taxes on it when I gift it to her. Would it be better to just put it in a envelope under the bed and call it day? LOL
I considered a 529 plan but I'm honestly not convinced she'll go to college, so I don't want that money to be wasted/penalized if used for purposes other than college. I know I sound awful saying she likely won't attend college, obviously I hope for the best for her, but that side of the family (ex-step mom's side) does not have a strong track record.
I appreciate any help!
I'm planning to open a savings account for my niece who turns a year old in a few days as part of her birthday gift. The goal is to put $50 in it for Christmas/birthdays and $25 for Easter. I'd also start an allotment for $5-10 a pay check to go in there. I would then gift her the balance of the account when she turns 21 (if she's responsible enough at that point). Roughly $5000-8000 depending how much I contribute every pay check.
I'm wondering if anyone can tell me if I would screw her (or myself) with taxes by doing this? I'd hate to be saving all this money for her and then find out she has to pay taxes on it when I gift it to her. Would it be better to just put it in a envelope under the bed and call it day? LOL
I considered a 529 plan but I'm honestly not convinced she'll go to college, so I don't want that money to be wasted/penalized if used for purposes other than college. I know I sound awful saying she likely won't attend college, obviously I hope for the best for her, but that side of the family (ex-step mom's side) does not have a strong track record.
I appreciate any help!
Re: Taxes on Gifts?
According to what I can see, the current gift exclusion level is $14,000, so your $8000 would be well under this. From what I can tell, it also looks like the donor is the one that pays the taxes.
https://www.irs.gov/instructions/i709/ch01.html#d0e307
Just a note.....if you think she'll go to college, you may want to consider holding the money and not giving it to her until after she does her FAFSA for senior year if she could potentially qualify for anything as the gift would be counted as her assets.
Just a second note....I asked my financial advisor about the 529 accounts and pulling money. She said it's just a 10% "penalty", but if you look at it this way, normal taxes on investments would be 15%, so technically, you're getting a 5% discount on non-educational use of the money.
Even if you don't use a 529 account, you might want to look at investing it at least in some sort of target date investment account. Savings accounts aren't paying diddly at this point.
The gift tax doesn't hit until (1) you have exceeded the annual limit (this year it is $14,000 per person per year) and (2) you have exceeded your estate tax exemption limit ($5.49 million/person in 2017).
It doesn't need to be reported until it's over the $14,000 limit, and you don't pay taxes on it currently until your lifetime limit is used up. It coordinates with the estate tax.
You and your H together can gift $28,000/year per individual (since each of you has $14,000). If you ever gift over $14,000 but less than $28,000 then you have to file the form in order to split the gift between you guys, but it still won't be taxable or reduce your estate tax exemption.
Contributions to 529 accounts are considered made the year in which the contribution occurs, not the year in which the beneficiary takes a withdrawal. They also have some special rules allowing you to frontload contributions - so you can do $70,000 ($14,000 x 5) in a single year but then make no further contributions for the next 4 years, and it won't be taxable or reduce your estate tax exemption.
Abrewer5 I would also discuss a 529 plan with the child's parents first because I've heard that sometimes well-meaning family members can damage the student's financial aid package because it is distributed to the student and then counts as their income (where the parents' 529 is counted as parental income). The 529 plan I will be opening after this little one is born has an option for family and friends to contribute to the plan we set up through a separate login (so they can give straight to the account, but can't see the balance or our investment options). Grandparents will NOT be allowed to open their own separate 529 for our kid.
Lucky. We only get $4k/year. The federal deduction would be nice.
Personally, I have issues with student loan forgiveness. But I also have issues with how student loans are essentially just handed out. Like there should be verification that a students expected career path matches expected annual salary.
Our oldest nephew might get a job in the next couple of years because he is getting to that age. When that happens I will look into Roth IRA options and discuss with his parents.
Thank you guys so much!!
It's highly unlikely I'll go with the 529 plan because I really don't know if she'll go to college, her side of the family doesn't tend to place high importance on education, unfortunately.