The gift tax annual exclusion amount is staying the same at $15,000 per person for 2021, which means it can be a good idea to make any planned gifts before the end of the year if you have not yet reached this maximum amount for 2020. Remember that if you are married, spouses can double the amount of that gift to one individual recipient up to $30,000. It can be recommended to make this from separate accounts to avoid the need to initiate a gift tax return.
Annual gift tax exclusions provide an opportunity to leverage next-level strategies in your estate and asset protection planning.
Consider Cashing of Gift Checks
Remember that in order to leverage annual gift tax exclusions in 2020, you’ll need to pay close attention to when a gift that has been paid by a check is cashed. The gift made to an individual is considered complete for gift tax exclusion purposes when it has been paid, certified and accepted by the bank of the person who cashed it. This means that you can’t just write a check by the end of 2020 and assume that it qualifies. However, it can still be deductible for income tax purposes in 2020 so long as the check is written by the end of the year and cashed within a reasonable amount of time. For specifics consult with your tax advisor about using annual gift tax exclusions properly.
Should You Gift by Credit Card?
If you don’t have the immediate cash accessible to make a gift, you can charge it to your credit card. Once it has been charged to your card, this is deemed a completed gift for charitable gift deduction purposes.
Does Tax Make Sense for Gifting?
If you’re making annual exclusion gifts, high basis assets or cash can decrease the chances of your recipient being faced with income tax on any appreciation. Making a gift of any appreciated stock that has been held for longer than a year rather than a gift of cash can be helpful since the gain on the appreciation does not get taxed. Be careful about making stock gifts when the market value is less than its cost basis. Selling the stock and donating the cash proceeds might be a better method of proceeding since the loss on the sale of the stock can be deductible against capital gains, offsetting as much as $3,000 of ordinary income.
Don’t Forget to Maximize Your Retirement Plan Contributions by End of 2020
As is the case with every year, it’s a good opportunity to maximize your contributions to all of your qualified retirement plans. Those above age 70 and a half can contribute to an IRA if they are otherwise ineligible. This is due to the implementation of the Secure Act of 2019 which eliminated the age cap on the ability to make IRA contributions.
Withdrawing from a Retirement Plan
If you have been severely impacted by Covid-19, you could be eligible to take advantage of the provisions of the CARES Act by withdrawing up to $100,000 from qualified retirement plans prior to the end of 2020. This will not trigger a typical 10% early withdrawal penalty, although you will want to be careful about keeping track of the distribution income tax. This amount can be paid over the course of three years, allowing the distribution to be returned to a qualified retirement plan within three years. For more information, schedule a consultation with a tax strategy lawyer.