Ho, Ho, Ho, Happy Holidays! December is here. Time to decorate and, most importantly, get cracking on those gift lists.
If you're not into frantic, crowd-fighting, last-minute shopping trips, here are five easy tax-related gifts for just about everyone on your nice list, including yourself.
1. Give to your favorite charities.
You're probably already well aware of this option, since nonprofits have been sending out year-end donation solicitations since Halloween. Their urgency can be forgiven a bit more this year because of the tax law changes.
Yes, this potential tax deduction did survive the Tax Cuts and Jobs Act (TCJA) and was even boosted a bit by allowing folks to give more, up to 60 percent of their adjusted gross income instead of the prior 50 percent. But the TCJA also nearly doubled the standard deduction amounts, meaning more folks will be claiming those instead of itemizing. And you don't get a charitable donation deduction unless you itemize.
Still, some folks will find the amounts they can claim on Schedule A will be more than their standard deduction amount. If that's you, itemize and make sure you maximize your deductions by following the charitable giving tax rules and claiming all your gifts to your favorite charities.
Even if you don't get a tax break, which most donors didn't even before the tax law changes, you'll feel the real Christmas cheer by knowing you've helped others with your philanthropic gift.
2. Give a Roth IRA to a young worker.
Roth IRAs are great retirement options since the money is not taxed when it's eventually taken out of the account. Young people are the prime beneficiaries of this long-term no-tax compounding.
But young people also tend to make less money and many find they can only stash very little, if any, of their earnings in a retirement account. They need all that cash, for example, to help pay for current or future college costs, not for some far-off (to them) day when they're no longer working.
You can help here by establishing or giving to a Roth IRA for a young worker in your life, such as your child or grandchild. There's no age limit for contributing to Roth. All the young person must do is earn some income. Then that amount, up to $5,500 for the 2018 tax year, can be put into a Roth IRA, by the earner or you, generous relative!
3. Donate your RMD.
Speaking of IRAs, lots of folks still have the traditional, tax-deferred versions of these retirement accounts. That means that when they turn 70½, they must start taking out specific amounts known as an annual required minimum distribution, or RMD.
The deadline, once you get past your first RMD that you can push into the next year, is Dec. 31. If you miss this year-end distribution, you'll face seriously costly penalties: 50 percent of what you should have withdrawn!
If, however, you don't need the required withdrawal to cover your daily expenses, consider donating the RMD amount — up to $100,000 — to your favorite charity. You won't get a deduction for the donation, but your gift will do good and you'll avoid any IRS penalties for not taking your RMD.
4. Make the most of the annual gift exclusion.
Money, the old saying goes, is the perfect gift. It always fits and green looks good on everyone.
A cash gift also can be a nice estate-planning present for wealthier individuals. By giving away some wealth while they're still around to get the thanks, they can reduce the amount of assets left to be distributed once they're gone, helping to keep their estate's value under the amount that will trigger the federal estate tax.
To help get your massive wealth below that taxable level — it's almost $11.2 million for 2018, or twice that for married jointly-filing couples — you can this year give as many people as you want up to $15,000. (FYI, this generosity is NOT limited to family, so if you have some spare cash and really enjoy the ol' blog, just let me know.)
Also, the gifts are not limited to dollars. You can give assets valued up to the limit, such as gifts of real property and family heirlooms as long as they are worth up to or less than the limit without incurring any gift tax responsibilities.
5. Help pay for your grandkids' college.
Another handy way to transfer wealth is to help pay for a grandchild's college education. Instead of giving your $15,000 gift to your grandchild person-to-person, tax law allows you to pay the student's tuition directly to the school and not count it as a gift under the gift exclusion rule. The school can be any educational institution, not just college.
You also can contribute to your grandchild's 529 plan. These college savings plans are named for the section of the federal tax code under which they were authorized, but are established and administered by states.
The earnings grow tax free. Even better, 529 distributions are not taxed when the money is used to pay allowable college costs, such as tuition, room and board, most classroom-related fees, books, supplies and equipment. Under the TCJA, 529 money now also can be used for private K-12 education costs.
If you're very wealthy, you can even front load your 529 gift, making five years' worth of $15,000 annual exclusion gifts in one year. For 2018 this come to (for folks like me who don't do math in their head) a possible $75,000 from a single donor or $150,000 from a couple. These gifts are treated as if they are made ratably over the current year and next four tax years.
If you contribute less than the $75,000 maximum, additional contributions can be made in subsequent years without incurring federal gift taxes or reducing your lifetime federal estate or gift tax exemption.
And while there's no federal tax deduction for 529 gifts, many of the states that establish and administer these college savings plans allow for at least a partial deduction of your contribution on your state income tax return.
More year-end tax moves: I hope these suggestions help you take care of some holiday gifts. But you also need to look at other tax moves for this last month of the year. After all, Dec. 31 is the drop-dead, absolutely final deadline to make most tax moves that affect the return you'll file next year.
You'll find more tax-saving ideas in the December Tax Moves listed in the ol' blog's right column. They're just below the bright red heading of the same name, just under the countdown clock ticking off the time left here in tax year 2018.
Want more? Check out the head start list of year-end tax moves from my November Tax Moves post.
Give all the year-end tax move options a look and take advantage of those that fit your financial and tax situations. They could provide you some nice holiday tax presents, as well as give you much to celebrate on New Year's Tax Eve.