Doing gifts to a grandchild can be a good idea, if you have intent to help the grandchild and the “extra” money to do so.
The “Annual Exclusion” (amount that is not a taxable gift) is $14,000 for each person you give to for years 2015 and 2016. Also, payments directly to the educational institution, medical provider or medical insurance company for that grandchild also are Annual Exclusion gifts in addition to the $14,000 check. It is also OK to give a lesser amount.
Only large gifts (greater than the Annual Exclusion) are to be reported on form 709, U.S. Gift Tax Return for each calendar year. There is a gift tax credit that means in almost every instance, there is no check to write to IRS. The taxable gift just reduces what you can leave at death without a death tax. $5,430,000 is the total you can do in taxable gifts and bequests at your death without paying either a gift or death tax.
The grandchild may have earned some wages in 2015 from a part time job. If so, they are eligible to do a ROTH IRA contribution equal to their total 2015 wages. Maybe your gift can be used to pay the ROTH IRA contribution that will start the benefits of long term savings.
The ROTH IRA can have investments in stocks of big, dividend paying companies, or bonds, or savings accounts. The wonderful benefit of compound earnings over many years is significant. It may encourage the grandchild to do savings and manage money effectively.
The cash gifts can be helpful to pay off credit card debts, buy a vehicle or start saving for the down payment to buy a home. The benefit to the grandchild is the gift can improve their quality of life and help them achieve their goals and desires.
We recommend a “love letter” accompany your gift. That letter can say how much you love them, how proud of them you are and make it clear it is a gift. Receiving a gift means it is not taxable income to the grandchild. Giving the gift is not an income tax deduction for the giver.
Maybe your gift could be used to help fund a Health Savings Account (HSA) for the grandchild. Health Savings Accounts are only available to persons who are not eligible for Medicare (age 65 or older). The money contributed to an HSA is a tax deduction for the grandchild, even if they don’t do Itemized Deductions on Schedule A of form 1040. The money is to be used to pay medical expenses. If that is done, the distributions from a HSA are not taxable income. To get a deduction for the contribution, but not be taxable on distributions to pay medical expenses is the best of worlds! The maximum annual contribution to an HSA for a single individual is $3,300.
It is difficult to buy gifts for grandchildren. It is hard to know what they really want. Maybe a gift by check would be a special benefit for them in many ways.
Did you hear? “Love is a short word, but it contains everything,” said Author unknown.
John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.