Written by Alex Seleznev, MBA, CFP®, CFA | Nov 15, 2023
As we approach the holiday season, many of us are pondering what gifts to give to our friends and loved ones. A new piece of clothing or electronics is always a nice and welcome choice.
Monetary gifts can be meaningful too, and it wouldn’t hurt to be as tax-efficient as possible if you decide to take this approach.
If you plan to make many small gifts to your family members, there is no need to complicate your life. Gift cash and enjoy the smiles on your relatives' faces.
If you want to make a larger cash gift, that’s fine too. Keep in mind the annual gift tax exclusion of $17,000 per person in 2023 (increased to $18,000 in 2024).
Not everyone is comfortable with large cash gifts because there is no certainty that the funds would be used the way you envision.
What are your options?
If your children or grandchildren are adults, consider gifting appreciated stock. This would help educate them about finances.
If they are in a lower tax bracket than you and decide to sell the stock, the family as a whole will save on taxes.
Do you want to help your children or grandchildren with college or K-12 private school tuition? Consider contributing to 529 college savings plans.
You will receive a state income tax deduction for the contributed funds and retain control over the account.
Do you want to educate your children on how to invest in stocks?
Open a Uniform Transfers to Minors (UTMA) account and decide which investments to purchase in collaboration with your child.
These accounts are more tax-efficient than regular investment accounts, as long as you don’t have much taxable income each year (below $2,500 in 2023).
Keep in mind that the UTMA account becomes your child’s property once they reach the age of majority, typically 18 or 21, depending on the state.
Are you feeling particularly generous and want to gift a large amount to your child for a house or another significant purchase?
Many parents still prefer to have some "strings attached" when dealing with large one-time gifts.
Consider creating a Promissory Note that outlines the terms of potential repayment and allows you to forgive a certain amount of the loan each year (e.g., $17,000 annual gift tax exclusion).
There are many ways to make monetary gifts both appreciated and valuable. You just need to be more creative in your approach!