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 2012, you can give up to $13,000 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.
A few online sites let you buy one share of stock and send the stock as a framed certificate. Oneshare.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 U.S. 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 paper Series I savings bonds is $5,000 per Social Security number and $10,000 limit for electronic Series EE and Series I. 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.
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 - such as a 401(k) or a SIMPLE - are critical focus area for maximizing contributions because the deferral lowers your taxable income. For 2012, most taxpayers can deduct as much as $16,500 directly from their salaries, indexed annually for inflation.
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:
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.
Gifts to Charity
An 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.
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.
The Bottom Line
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.
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