The search for the perfect gift may get you thinking green this year - not in an environmental sense, but rather a monetary one. Financial gifts can be generous contributions to friends and family, or even a generous contribution to your own retirement. Each has potential benefits and drawbacks that you should be considering before you start stuffing those gift-money envelopes.
Gifts for Friends and Family
Despite the finger shaking of etiquette experts, most folks are happy to accept a gift of money. When you give funds, however, it's critical to know your limits so you avoid penalties for your largesse.
Cold, Hard Cash
You can give cash to anyone - children, relatives, or friends - but for those who are not your spouse (to whom you can give every dime and then some) you must limit your generosity. In 2009, you can give up to $13,000 per year per person - and married couples can combine forces and double the lucky recipient's gift.
Get too generous and you'll be subject to the so-called
gift tax, which taxes you, the donor, for giving away your money. A direct contribution loophole, however, lets you pay for another's education or medical care. This means that you can pay tuition for your niece in art school as long as you pay the institution directly.
Securities in the Digital Age
Giving stocks or bonds demands a somewhat intimate relationship with your recipient: you'll need the person's
Social Security number so that the security can be legally held in the recipient's name. Securities are considered property, so the same gift tax that applies to cash can apply here as well. (For related reading, see
Holiday Gifts For Financial Geeks.)
A few online sites let you buy one share of stock and send the stock as a framed certificate.
Oneshare.com and
Singleshare.com work like your standard online retailer, offering menus for choosing the right stock for your coffee-loving mom or your cartoon-crazy nephew. You essentially pay above the market value for the stock - but your recipient gets a framed certificate with a personalized engraving.
A conservative securities option is to buy
U.S. savings bonds, which you can buy directly from the
Treasury at no fee. Savings Bonds pose less risk because they have a guaranteed repayment amount and they gain interest for up to 30 years. The annual limit for buying bonds is $5,000 per Social Security number, per bond type. That is, you can buy $5,000 worth of electronic and paper bonds of each series,
Series EE and
Series I, or a total of $20,000. To buy bonds electronically, you and your recipient must have TreasuryDirect accounts. You can buy paper bonds at any financial institution - but it may take up to three weeks to receive them. (To learn more, read
The Lowdown On Savings Bonds.)
Gifts to Yourself
Taking care of No.1 should be a priority during the holidays. Give yourself a gift toward your future by holding on to more of your money now: maximize your retirement accounts and stay current on tax deductions that can turn work into play.
Retirement Mix and Match
The many flavors of retirement plans can make banking the most money in the cheapest way a little tricky. You can contribute to more than one retirement plan, with each type specifying different contribution limits.
Tax-Deferred Plans
Tax-deferred plans - such as a
401(k) or a
SIMPLE - are critical focus area for maximizing contributions because the deferral lowers your taxable income. For 2007, most taxpayers can deduct as much as $15,500 directly from their salaries (this amount will be indexed to inflation starting in 2008).
Employer-Sponsored Plans
If your employer offers some form of retirement plan and you're not participating, then you may be kissing thousands of dollars goodbye each year in
employer-matched contributions and losing out on hundreds of thousands in future retirement dollars from compound interest.
You can participate in an employer-sponsored plan as well as in either a
Traditional or
Roth IRA. Contribution rules are governed by your taxable income, your age and the specific types of accounts you hold. Ultimately, the more money you can contribute, the more of your own money you keep. A simple calculation shows how compound interest works in your favor.
Example - The Benefits of Compound Interest
You put $5,000 into an IRA that averages an 8% annual return (typical for an index fund) for four years and never put in another cent. Twenty years later, your money will have grown by more than four times through compound interest:
Principal x (1 + Rate) ^ Number of Years = Future Amount
$20,000 x (1 + .08) ^ 20 (to the twentieth power) = Future Amount
$20,000 x (4.66) = $93,000 |
It's also good to remember that you can also maximize contributions to IRAs for both you and your spouse, even if one of you makes little or no income, as long as you file a joint return. (To read more on the subject, see
Gifting Your Retirement Assets To Charity and
Saving Money With A Private Annuity Trust.)
Business Deductions
Treat yourself to some travel away from home and you could deduct certain expenses from your taxes. Deductible expenses can include transportation, car rental, lodging and meals and even tips. To use these deductions to your benefit, you must keep meticulous records of your expenses and any advances from your employer.
Example - Deductible Business Expenses
A week-long business trip takes you to San Francisco and you decide to explore the area over the weekend. You can deduct all business-related travel expenses, such as traveling to and from the destination. However, taking a vacation to Vegas and scheduling a short business meeting over dinner one night will not make your entire trip deductible. You can deduct the expenses of the meeting only. |
With cruise lines like Carnival making internet and email more accessible for business travelers, cruise conventions have grown in popularity. As with typical business travel, the cruise must meet specific requirements and you will need meticulous documentation. You can deduct up to $2,000 per year for a business cruise - but don't even think about trying to deduct the expenses to bring your family along!
Gifts to CharityAn end-of-year financial gift to a charity can represent your investment in a cause close to your heart. Most
charitable donations are tax-deductible, as long as you give to a legitimate organization, such as a
501(c) - so be sure to research thoroughly. (To read more on giving to charities, see
Deducting Your Donations,
It Is Better To Give AND Receive and
The Christmas Saints Of Wall Street.)
Donating Cash or Securities
For gifts of less than $250, the
IRS accepts a canceled check as proof of your donation. But as your generosity grows, so does the paperwork: for larger donations you need a receipt that shows the name of the organization, the donation amount, the contribution date, and a description of the property or services you may have received. You may also have to show paperwork from the organization verifying that it has received the amount donated.
To donate securities, you must hold them for more than a year. Choosing a direct contribution from your financial institution to your charity avoids capital gains and ultimately keeps more money in your pocket.
Example - Avoiding Capital Gains on Donations of Stock
You have 100 shares purchased in 2000 for $5,000; they are now worth $10,000 and you want to donate that $10,000 to a local shelter. If you sell the stock, you must pay capital gains taxes, which means part of your donation will come from your own pocket. But if you transfer the shares directly to the charity, you avoid capital gains. You also get to take a charitable income tax deduction for the full market value of the stock. |
In the Name of Another
Making an honorary donation to a charity is considered the perfect gift for someone who has everything. As a bonus, the donation gives your recipient the warm fuzzies, and you get the tax deduction.
To Ho-ho-ho or to Humbug?This year, make the choice to step out of your circle of comfort of department store finds and give a gift that everyone can use - money. This does not have to be a last-minute cash grab from an ATM, but can be a well-planned and appreciated attempt to help your loved ones better their financial circumstances.
by Stephanie Barton, (Contact Author | Biography)
Stephanie Barton is a writer and editor who has spent the past decade tackling a wild range of topics. She has hit the local bar scene to rate cocktails for ForbesTraveler.com, test-driven a Porsche Boxster on the autobahn for a European lifestyle magazine, produced campaign reports on tax assistance programs for the United Way, edited books on software for Sybex/Wiley & Sons and edited books on health care for Elsevier. Stephanie provides writing and editing services through www.tougheditor.com.
