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6 tax-smart financial gifts for grads (and the givers)

Graduate balloon
One of our neighbors made sure we all knew they had a new, cool graduate. (Photo by Kay Bell)

I swear, my nieces and nephews were just in kindergarten. And wasn't that neighbor kid trick-or-treating as a dinosaur a couple of years ago?

So how am I getting high school and college graduation announcements for these young people?

Most of them will get a nice, actual paper congratulations card. A few will find a gift card tucked inside.

However, a couple of these newly minted young adults will get actual gifts. But they won't be items that have to wrapped.

Rather, I'm tending toward some financial gifts — the six listed below — that could pay off for the new graduates long after they receive their diplomas.

1. Pick up a student loan payment. This is the hot issue with college grads, both from years (decades) ago and now. While there's some movement on Capitol Hill to offer relief, until then you can help a new graduate make one or more of these higher education payments.

The best way to do this, say most financial advisers, is to give the amount for the payment to the student borrower, with the condition the funds go toward the loan. That way, the borrower will be able to claim any student loan interest tax deduction associated with the payment.

Also make sure that when the recipient grad sends in the gifted loan money, they make it clear to the lender that it should be designated as an extra payment of principal, not an early payment of the loan's next installment. This tax break is an above-the-line deduction of up to $2,500 in interest.

As for your loan payment gift, as long as it's not more than the annual exclusion amount, which is $16,000 for 2022, you won't face any tax consequences.

2. Cover moving expenses. Before the Tax Cuts and Jobs Act of 2017, the costs of moving for your first job was potentially tax deductible. No longer, unless your new position is in the military. If your grad has landed a dream job that requires an expensive relocation, help underwrite some of those moving costs.

Depending on the distance, this could be a substantial amount, so you'll want to keep an eye on that gift exclusion limit.

3. Make an IRA contribution. Did your high school or college grad work while in school earlier this year, or will either as a summer or full-time job? You can help them keep all that hard-earned cash and plan for their still far-off post-work years by contributing to (or opening) a custodial IRA account.

These retirement accounts are a great long-term financial move for not-legally-an-adult workers. Here an adult — usually parents or grandparents, but also any person who is close enough to have access to the personal information necessary to open an account — can open an IRA and mange it on behalf of the young person who's earned/earning income. Then when the youngster turns 18 or 21, depending on the state where they live and the account is opened, the IRA can be transferred to a retirement vehicle in the young adult's name.

Until then, the adult custodian can contribute directly to the account, up to the annual IRA maximum or the total amount the youngster earned if it's less than that. For 2022, the maximum IRA contribution is $6,000.

Also, while I've referred to this gift generally as an IRA, obviously I'm talking Roth IRA for a young person. Money that goes into a Roth is after tax, but the eventual withdrawals of those contributions and earnings is tax free. That's a fantastic and potentially life-changing gift for young people just starting their careers.

4. Contribute to your grad's 529 plan. Most families nowadays set up 529 plans to help their youngster meet at least some college costs. One of the many benefits of these tax-advantaged educational savings accounts is that they accept third-party contributions, regardless of who owns the account.

"That means anyone, including grandparents, aunts, uncles or even friends can help a child save for college," writes Kathryn Flynn at SavingForCollege.com. "You do not have to be a family member of the beneficiary to contribute to their 529 plan."

Such contributions can help with a new high school grad's entry into college, or a college graduate's goal of continuing work on a master's or doctoral degree.

Of course, if you're a friend contributing, you'll need to talk with the student's family, since a 529 plan could affect a student's financial aid eligibility.

As for you, the graduation gift giver, a contribution to a 529 plan qualifies for the previously noted annual federal gift tax exclusion, meaning as long as you stay under this year's $16,000 amount, you won't face any gift tax consequences.

5. Give stock or other assets. If you're an owner of stocks or mutual funds, you probably are freaking out a bit — OK, a lot — by the stock market's recent dive. But the reduced prices also make it great time to get a young investor started.

By buying at current lower values, the equity gift has lots of time during the new grad's life to grow.

Your broker can help you with the process of gifting assets, either by transferring assets you already own or by buying a stock or mutual and putting it into a custodial brokerage account for the new young investor. You also can get an overview of the process in this NerdWallet piece, How to Give Stock as a Gift.

Again, if you're giving assets you own, you won't face any gift tax liability as long as the values of the stock is less than $16,000.

6. Say it with cash. If you're confident your graduate can handle money, there's always my favorite gift to receive. Cash. As the saying goes, it's always the right size and everybody looks good in green.

One more time, the only thing you need to worry about is the gift exclusion amount. But for me and I suspect most of the ol' blog's readers, that $16,000 isn't a concern. For us, our bank can supply us with some crisp new bills we can tuck into a "Congrats, Graduate!" card that we plan to hand-deliver to the new grad. In these cases, you also can take some time with your gift recipient to talk about some wise financial uses of the cash.

When cash giving is more long-distance, then the gift cards I mentioned earlier in this post are recommended, especially if you're depending on U.S. Postal Service delivery.

Whatever gift you decide to give the graduates in your life, I'm sure they'll love it. It is, after all the thought that counts.

But it's always a bonus, for the giver and recipient, when the thought also helps financially with continuing education or that first step into post-school adulthood.

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