Holiday Gifts That Offer Tax Benefits for You and Your Loved Ones
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Article Highlights:
- Educational Gifts:
- A Gift for the Present
- A Gift for the Future
- Retirement Contributions: A Gift with Long-Term Benefits
- Gifts to Spouses: Supporting Self-Employment
- Employee Gifts: Navigating Tax Implications
- Working Children Gift
- Understanding the Annual Gift Tax Exclusion
- Summary
The holiday season is a time of giving, and while the joy of gifting is often its own reward, there are ways to make your generosity even more impactful through strategic tax planning. By understanding the tax implications of certain gifts, you can maximize the benefits for both the giver and the recipient. This article explores various holiday gifts that come with tax advantages, including educational gifts, gifts to spouses, employee gifts, and contributions to retirement accounts.
Educational Gifts:
- A Gift for the Present
- One of the most meaningful gifts a grandparent can give is the gift of education. Paying a grandchild's college tuition directly to the institution not only supports their educational journey but also provides significant tax benefits. According to IRS rules, such payments are exempt from gift tax and do not count against the annual gift tax exclusion. This means grandparents can pay tuition directly without worrying about gift tax implications.
Moreover, this act of generosity can also benefit the child's parents. If the grandchild is claimed as a dependent, the parents may be eligible for education tax credits, such as the American Opportunity Tax Credit (AOTC). This credit can reduce the amount of tax owed by up to $2,500 per eligible student, providing a financial boost to the family. Thus, paying tuition can be seen as a dual gift: one to the grandchild in the form of education and another to the parents in the form of a tax credit.
Moreover, this act of generosity can also benefit the child's parents. If the grandchild is claimed as a dependent, the parents may be eligible for education tax credits, such as the American Opportunity Tax Credit (AOTC). This credit can reduce the amount of tax owed by up to $2,500 per eligible student, providing a financial boost to the family. Thus, paying tuition can be seen as a dual gift: one to the grandchild in the form of education and another to the parents in the form of a tax credit.
- A Gift for the Future
- Donating to a Section 529 plan can be a thoughtful and practical holiday gift that combines the spirit of giving with valuable tax benefits. A 529 plan is a tax-advantaged savings account designed to encourage saving for future education expenses. Contributions to a 529 plan grow tax-deferred, and qualified withdrawals are tax-free when used for eligible education expenses, such as tuition, room and board, and other related costs. One of the most attractive aspects of gifting to a 529 plan is that contributions are considered completed gifts for tax purposes, which means they qualify for the annual gift tax exclusion. For the 2025 tax year, individuals can gift up to $19,000 per recipient ($38,000 for a married couple) without triggering gift taxes or reducing their lifetime gift and estate tax exemption.
Additionally, the 529 plan offers a unique five-year election option that allows individuals to supercharge their gift by front-loading contributions. This option permits contributors to treat a contribution as if it were spread over five years for gift tax purposes, up to five times the annual exclusion amount. For instance, a single contributor could donate up to $95,000 in one year ($190,000 for a married couple) without incurring gift tax consequences, provided no additional gifts are made to the same beneficiary during the five-year period. This feature enables grandparents or other family members to make significant contributions to a child's education fund while effectively reducing their taxable estate, making it an excellent strategy for both holiday giving and long-term financial planning.
Retirement Contributions: A Gift with Long-Term Benefits
Providing the funds for someone to contribute to their retirement account, such as a traditional IRA, can be a gift that provides long-term benefits. For the gift recipient, contributions they make to a traditional IRA may be tax-deductible, reducing their taxable income for the year. This deduction can be particularly beneficial for individuals in higher tax brackets who aren’t covered by an employer’s retirement plan.
The annual contribution limit for IRAs is subject to change, so it's important to check the current limits. For 2025, the limit is $7,000, or $8,000 for those aged 50 and over. By helping a loved one contribute to their traditional IRA, you are not only helping them save for retirement but also potentially providing them with immediate tax savings.
Gifts to Spouses: Supporting Self-Employment
Gifting items to a spouse that are used in their self-employment can be both a thoughtful gesture and a savvy tax move. For instance, if your spouse is self-employed and you gift them a new laptop or office equipment, these items can be deducted as business expenses on their tax return. This deduction reduces the taxable income from their business, potentially lowering their overall tax liability.
It's important to ensure that the gifted items are indeed used for business purposes and that proper documentation is maintained. Receipts and records of business use should be kept substantiating the deduction in case of an audit. This strategy not only supports your spouse's business endeavors but also provides a financial benefit through tax savings.
Working Children Gift:
Contributing to a Roth IRA on behalf of working children or grandchildren can be a profoundly impactful holiday gift that is rich with future potential. Young earners often overlook retirement planning, preferring to spend their hard-earned money on immediate needs or desires rather than contributing to retirement accounts. By stepping in to make a Roth IRA contribution, you are not only teaching the importance of early saving but also providing a gift that grows with them. Contributions to a Roth IRA are made with after-tax dollars, allowing for tax-free growth and tax-free withdrawals in retirement, provided certain conditions are met. Even modest contributions, when given the advantage of time, can accumulate significantly thanks to the power of compound interest. For example, a $1,000 contribution made today for a young worker can potentially grow to tens of thousands of dollars by retirement age, depending on the rate of return. This simple gesture not only helps secure their financial future but also imparts a valuable lesson in financial planning, making it a cherished and enduring holiday gift.
Employee Gifts: Navigating Tax Implications
Many employers choose to show appreciation to their employees during the holiday season through gifts. However, it's crucial to understand the tax implications associated with different types of gifts.
- De Minimis Fringe Benefits: These are gifts of minimal value, such as holiday turkeys or small gift baskets, which are not subject to taxation for the employee. The employer can deduct the cost of these gifts as a business expense.
- Cash and Cash Equivalents: Gifts of cash, gift cards, or any item that can be easily converted to cash are considered taxable income for the employee. These must be reported as wages and are subject to payroll taxes. Employers should issue these gifts through payroll to ensure proper tax withholding.
- Non-Cash Gifts: Items that are not easily convertible to cash, such as a company-branded jacket, may not be taxable if they fall under the de minimis threshold. However, more valuable items may need to be reported as income.
Understanding the Annual Gift Tax Exclusion
The annual gift tax exclusion is a key consideration when planning holiday gifts. For 2025, the exclusion amount is $19,000 per recipient. This means you can give up to $19,000 to any number of individuals without incurring gift tax or needing to file a gift tax return. Married couples can combine their exclusions to give up to $38,000 per recipient.
Gifts that exceed the annual exclusion may require the filing of Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return. These excess amounts also count against the lifetime gift and estate tax exemption, which is $13.99 million for 2025.
By staying within the annual exclusion limits, you can make generous gifts without affecting your lifetime exemption or incurring additional tax obligations.
Summary
The holiday season offers a unique opportunity to give gifts that not only bring joy but also provide financial benefits through tax savings. Whether it's paying a grandchild's tuition, supporting a spouse's business, gifting employees, or contributing to a retirement account, understanding the tax implications can enhance the impact of your generosity.
By strategically planning your holiday gifts, you can maximize the benefits for both you and the recipients, ensuring that your gifts continue to give long after the holiday season has passed. Always consult with a tax professional to ensure compliance with current tax laws and to tailor your gifting strategy to your specific financial situation.
If you have questions, give this office a call.
If you could not complete your 2024 tax return by April 15, 2025, and are now on extension, that extension expires on October 15, 2025. Failure to file before the extension period runs out can subject you to late-filing penalties. There are no additional extensions (except in designated disaster areas), so if you still do not or will not have all the information needed to complete your return by the extended due date, please call this office so that we can explore your options for meeting your October 15 filing deadline. If you are waiting for a K-1 from a partnership, S-corporation, or fiduciary (trust) return, the extended deadline for those returns is September 15 (September 30 for fiduciary returns). So, you should probably make inquiries if you have not yet received that information. Late-filed individual federal returns are subject to a penalty of 5% of the tax due for each month, or part of a month, for which a return is not filed, up to a maximum of 25% of the tax due. If you are required to file a state return and do not do so, the state will also charge a late-file penalty. The filing extension deadline for individual returns is also October 15 for most states. In addition, interest continues to accrue on any balance due, currently at the rate of just over .5% per month. If this office is waiting for some missing information to complete your return, we will need that information at least a week before the October 15 due date. Please call this office immediately if you anticipate complications related to providing the needed information, so that a course of action may be determined to avoid the potential penalties. Additional October 15, 2025, Deadlines – In addition to being the final deadline to timely file 2024 individual returns on extension, October 15 is also the deadline for the following actions: - FBAR Filings - Taxpayers with foreign financial accounts, the aggregate value of which exceeded $10,000 at any time during 2024, must file electronically with the Treasury Department a Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR). The original due date for the 2024 report was April 15, 2025, but individuals have been granted an automatic extension to file until October 15, 2025. SEP-IRAs – October 15, 2025, is the deadline for a self-employed individual to set up and contribute to a SEP-IRA for 2024. The deadline for contributions to traditional and Roth IRAs for 2024 was April 15, 2025. Special Note – Disaster Victims – If you reside in a Presidentially declared disaster area, the IRS provides additional time to file various returns, make payments and contribute to IRAs. Check this website for disaster-related filing and paying postponements. Please call this office for extended due dates of other types of filings and payments and for extended filing dates in disaster areas. Please don’t procrastinate until the last week before the due date to file your extended returns. Final note: if for whatever reason you miss the October 15 deadline, you should still file your return as soon thereafter as possible. If you need a professional to assist you with your taxes or need tax information, get started with Steve Brewer CPA & Company.
After September 30, 2025, the IRS will NOT accept checks, money orders, cashier checks, etc. for payment of taxes, penalties, fines and interest. You will only be able to pay by ACH or with credit card. This does not affect the third quarter estimated individual tax payments which are due on September 15, 2025. It will affect every business and individual who will be making any form of payment thereafter. The fourth quarter estimate payment is due on January 15, 2025. You will not be able to pay this by check. It must be in some form of an electronic payment. You could go ahead now and make your fourth quarter estimate payment by September 15 along with the third quarter payment. You will need to designate the payment as fourth quarter and enclose any payment voucher you have. The estimate vouchers we give you do have instructions on how to pay online for both federal and state. What does this mean if you owe on your tax return? 1. You will have to arrange payment using the instructions that are included on your payment voucher. 2. If you have set up an individual account with the IRS, you may make the payment via that account. 3. Finally, we can arrange through our tax software to have the amount due deducted from your bank account. We must do this at the time of filing the return. Once the return is filed, we cannot refile it. We are going to offer another option. An individual estimated tax payment service. In this service we will arrange payment of your estimated payment each time one comes due. We will contact you about 2 weeks prior to the due date to confirm your information. We will then arrange for the estimate payment for both the federal and state. We will be offering this service for each quarter. For most of you it will be arranging payment of the estimates which we give you when you pick up your tax return. If you are one of our clients who we calculate up-to-date payments, you may add on this service. The cost of this service is $200 per year. If you are uncomfortable working with a computer, do not have time each quarter or just want to get it done, then this service is for you. If you are interested, please call Christina at the office to arrange a call to discuss this.
Many taxpayers don’t feel the need to keep home improvement records, thinking the potential gain when they sell their home will never exceed the amount of the tax code’s exclusion for home gains explained as follows. Under the current version of the tax code, you are allowed to exclude from your income up to $250,000 ($500,000 for married couples) of gain from the sale of your primary residence if you owned and lived in it for at least 2 years (24 months) of the 5 years before the sale. You also cannot have previously taken a home-sale exclusion within the 2 years immediately preceding the sale. There is no limit on the number of times you can use the exclusion if you meet these time requirements; however, extenuating circumstances can reduce the amount of the exclusion. The home-sale gain exclusion only applies to your main home, not to a second home or a rental property. As noted above, you must have used and owned the home for 2 out of the 5 years immediately preceding the sale. The years don’t have to be consecutive or the closest to the sale date. Vacations, short absences, and short rental periods do not reduce the use period. If you are married, to qualify for the $500,000 exclusion, both you and your spouse must have used the home for 2 out of the 5 years prior to the sale, but only one of you needs to meet the ownership requirement. When only one spouse in a married couple qualifies, the maximum exclusion is limited to $250,000 instead of $500,000. If you don’t meet the ownership and use requirements, there are some situations in which a prorated exclusion amount may be possible. An example of this situation would be if you were required to sell the home because of extenuating circumstances, such as a job-related move, a health crisis or other unforeseen events. Another rule extends the 5-year period to account for the deployment of military members and certain other government employees. Please call this office if you have not met the 2 out of 5 rule to see if you qualify for a reduced exclusion. But what if your home sale gain is more than the home sale exclusion? Then it is in your best interests to have kept home improvement records, since the costs of improvements can be added to your purchase price of the home to be used in determining the gain. So keeping the receipts for the improvements, even if only in a folder or a shoe box, may be useful in the future when you sell your home. Here are some situations when having home improvement records could save taxes: The home is owned for a long period of time, and the combination of appreciation in value due to inflation and improvements exceeds the exclusion amount. The home is converted to a rental property, and the cost and improvements of the home are needed to establish the depreciable basis of the property. The home is converted to a second residence, and the exclusion might not apply to the sale. You suffer a casualty loss and retain the home after making repairs. The home is sold before meeting the 2-year use and ownership requirements. The home only qualifies for a reduced exclusion because the home is sold before meeting the 2-year use and ownership requirements. One spouse retains the home after a divorce and is only entitled to a $250,000 exclusion instead of the $500,000 exclusion available to married couples. There are future tax law changes that could affect the exclusion amounts. Everyone hates to keep records but consider the consequences if you have a gain and a portion of it cannot be excluded. You will be hit with capital gains (CG), and there is a good chance the CG tax rate will be higher than normal simply because the gain pushed you into a higher CG tax bracket. Before deciding not to keep records, carefully consider the potential of having a gain more than the exclusion amount. Home improvements include just about anything that will increase the value of the home, from big ticket items like remodeling a kitchen, adding another room or a swimming pool, and landscaping to smaller items like ceiling fans. But there are some home improvements that cannot be included in the cost of home improvements, or may be only partly included. Examples are items which qualify for tax credits such as home solar, home energy efficient improvements or those that qualify for a tax deduction such as handicap improvements. In addition, the costs of general maintenance or repairs, such as fixing leaks, painting (interior or exterior), and replacing broken hardware do not count as improvements. If you have questions related to the home gain exclusion or questions about how keeping home improvement records might directly affect you, please give this office a call.