Don't Mess With Taxes

Photo by Keith Luke on Unsplash

Congratulations to this year’s high school and college graduates.

Walking across that stage and getting that diploma is a ceremony they and their families have long waited to experience. So what, besides sincere well wishes, do you give the graduates in your life for reaching this milestone?

There are lots of gifts that can help young adults as they head off to college or into the work world. My personal favorite when I was that age was cash. (Truth be told, it still is my preferred present!)

If your favorite graduate is like me, then sticking some currency or a gift card in a “Congrats, Grad!” greeting card will be welcome. But if you find currency too crass, here are seven other financial gifts that could pay off for the new graduates and, in some cases, the givers.

1. 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 graduate 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. But when it comes to larger financial gifts, the Internal Revenue Service gives you some leeway.

Gift amounts are never taxable to the recipient, so any size financial help here is indeed a welcome no-strings-attached present.

From the giver’s tax perspective, the Internal Revenue Code allows you to give a specific amount, known as an annual exclusion, in gifts to others. Such gifts are used by those who want to reduce the amount of their estate's eventual value that is subject to the federal 45 percent (for now) estate tax.

For 2024, that exclusion amount is $18,000 per gift. The gift exclusion limit each year is per person, so you and your spouse each can give a combined $36,000 to the same graduate this year.

While amounts that size typically are given to relatives, there’s no family requirement. You can give up to the exclusion amount to as many people, related or not, you choose.

2. 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 $18,000 amount, you won't face any gift tax consequences.

3. Make an IRA contribution. Did your graduate work while in school earlier this year? Or will they soon get a summer job before starting (or resuming) classes? 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 2024, the IRA contribution maximum is $7,000.

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.

If your grad is too old for a custodial account, and you trust the young person to save rather than spend the gift, you can give cash to cover the young worker’s IRA contribution. Just keep a tally for your year’s gift exclusion amount.

4. Give stock or other assets. If you're an owner of stocks or mutual funds, you know they are an important component of your overall financial plan. It’s never too early (or late) to pass that money lesson on to others, especially young investors who have decades for the assets to grow.

Your broker can help you with the process of gifting assets, either by transferring assets you already own or by buying, for example, a mutual fund or exchange-traded fund, and putting it into a custodial brokerage account for the new 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 $18,000.

5. Buy them a CD or U.S. savings bond. These financial options are close to cash, but their structures make them harder to spend frivolously. Like equity investments, both a certificate of deposit, or CD, and/or savings bonds are longer-term investments. In fact, they typically lose some (or all) of their value if cashed in early, so to get the maximum out of them, the graduate must leave them alone, at least for a while.

A higher-interest CD will produce taxable interest. You can account for that by offering to pay that amount’s the full tax liability for the first year. And the young owner might not even make enough to have to file a return on which to report it. You can find an appealing CD rate by searching online, for these savings vehicles at brick-and-mortar or virtual banks.

Savings bonds are free from federal tax until they hit their maturity date. The bonds’ earnings are not taxable at all at state or local levels. Check out I bonds, whose interest rate changes every 6 months, based on inflation. The current rate is at 4.28 percent. You can find more on savings bond options at Treasury Direct’s special online section.

6. Pick up a student loan payment. College costs continue to rise. And this year, a lot of students were caught in the botched Free Application for Federal Student Aid (FAFSA) mess. Some students who’ve missed out on scholarship and grants in the wake of the FAFSA problems are relying on loans. Here, a cash gift could help with these unexpected 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. This tax break is an above-the-line deduction of up to $2,500 in interest.

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.

As for your loan payment gift, as long as it's not more than the annual exclusion amount — one last time, that’s $18,000 for 2024 — you won’t have any problems.

7. Help your grad learn to budget. To paraphrase an old proverb, give young people some money and they’ll be OK for a day; teach those young people to budget, and they’ll be set for life.

Creating and following a budget gives us all, young or older, a full picture of income, expenses, and how to manage their interconnected cash flow. You can help your graduate achiever greater financial independence by helping them learn to budget.

The easiest way to budget, and most appealing to these kids today, is via an app.

Some of the more popular, and recommended, are Rocket Money, YNAB, PocketGuard, EveryDollar, Goodbudget, Empower Personal Dashboard, Monarch Money, and Stash. You can check out the reviews/comparisons of various budget apps in CNET Money, Forbes Advisor, and NerdWallet stories.

Talk with your grads (and their parents) about the budget app that best fits their money knowledge and needs, and offer to pay for the first year of service.

One or more of these financial graduation gifts should appeal to you and your favorite new graduate. And all have the potential to help the young recipient attain financial security, which is an enduring and most valuable gift of all.

You also might find these items of interest:

• A quick lesson on 8 education tax breaks
• Tax-smart ways grandparents can help pay for college
• 4 tips to deal with the resumption of student loan payments
• 529 plan changes under SECURE 2.0 should boost retirement savings

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