Don't Mess With Taxes

Stumped when it comes to some Christmas presents? It can happen to even the most experienced gift-giver. Here are some tax-related suggestions that might help you be a good Tax Santa this year.

Not that anyone is counting, but Christmas is just two weeks away.

OK, we’re all counting. And some of us are freaking out a little bit over what to get certain people in our lives.

If you, like me, haven’t finished your holiday shopping, here are five financial gifts, some with Internal Revenue Code benefits, that could help you be a great Tax Santa.

Open a Roth IRA for a young worker. This is a great way to help out a young relative or friend's child whom you consider family. The young person already is showing financial initiative by getting a job. But since young people tend to make less money, especially those still in their teens, they tend to overlook the benefit of savings for some far-off (to them) day when they're no longer working.

You can nudge them toward that goal with a Roth IRA. The compounding of tax-free earnings for decades will be a perennial gift. Even better for the young person now, they still have access to all their earnings on which the Roth gift is based.

There are three important things to note here.

First, while holiday gifts usually are surprises, in this case you need to talk with the youngster's parents. A Roth IRA needs to be started and managed by a parent or other adult as a custodial account. It probably would be better if you worked with the child's parents to establish the account.

Reminders two and three are the same ones that apply to all IRA accounts.

Second, the child must have earned income in order for money to go into an individual retirement arrangement (that's the official name, although most of us use account for the acronym's A). This is money earned from a job where a W-2 is issued, or from self-employment such as baby-sitting or dog walking or tutoring.

Third, contributions are limited by (a) the annually adjusted contribution amounts, and (b) how much the child earns during the tax year. For 2024, the Internal Revenue Service says that the most that can go into an IRA, Roth or traditional, is $7,000.

But if the young worker made only $5,000 this year, that's the maximum that can go into the IRA. Workers of any age can contribution the maximum annual limit or their earned income amount if those earnings are less than the limit.

Pay a student's tuition. If the young person’s job was to earn money to help pay for college, support that goal by making a direct tuition payment to the accredited educational institution the student attends.

Financial gifts usually are limited by the annual gift exclusion amount, which is how much you can give without having to file a gift tax report. For the 2024 tax year, that’s $18,000.

But in the case of direct tuition payments, you can avoid the gift tax implications even if the tuition amount exceeds the 18 grand limit.

You can make the unlimited tuition gift to anyone, not just a family member. But if you're a grandparent, there's another tax bonus. These tuition payments are not subject to generation-skipping tax (GST) limitations.

Again, the key is making the gift directly to the school. Don't give it to the young person or their family to then use to pay,

Cover other college costs. The gift tax exclusion exception for direct tuition payments is for just that. It cannot go toward books, supplies, dormitory fees, or similar college expenses. But you also can help cover these necessary ancillary costs by contribution to the student’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 a wide variety of allowable college costs, including tuition, room and board, most classroom-related fees, books, supplies, and equipment.

There’s also the option to super fund your 529 plan gift upfront by making five-years-worth of annual exclusion amount gifts  — again, that’s $18,000 in 2024, or a total of $90,000 — in one year. The gift then is treated as if it is made ratably over the year given and the next four tax years.

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.

Pay someone's medical expenses. Unexpected large medical expenses are a major financial problem that many of us face at some time in our lives. Gifts on someone else's behalf to help cover their medical costs also are exempt from the gift tax exclusion, or $18,000 this year.

Specifically and technically, the tax code says you can pay for anyone's medical costs related to diagnosis, mitigation, treatment, or prevention of a disease. Realistically, this means deductible medical costs. That includes payments for medical insurance, prescription drugs, or payments directly to a provider for medical care.

As with the education costs, you must pay the medical provider directly.

Give to charity in honor of someone. You're probably already well aware of the charitable giving option, since it seems like nonprofits have been sending out year-end donation solicitations since Halloween.

But instead of giving to your favorite charity, consider giving to one near and dear to a friend or family member and making the gift in their name.

There’s no tax benefit here for the recipient or for you if you don’t itemize, but it’s a nice gesture. And not only will the person whom you honor with a gift in their name be pleased, so will the charitable organization.

Many of these tax-related financial gifts obviously are more beneficial for very wealthy people who can afford to dole out five-figure financial gifts. But even if you don’t max out the gift exclusion amount, you still can help pay any amount toward educational or medical costs. The recipient would have to be some sort of Grinch to scoff at any help.

And your gift, like all the best ones, will help you enjoy the real spirit of Christmas by knowing you've helped others.

You also might find these items of interest:

• 7 financial gifts, some with tax benefits, for graduates
• Thumbing through the IRS' medical deduction (or not deductible) list
• Inflation eases tax bites in 2025 on capital gains, estates, and other wealth-related income

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