For all the care that goes into choosing gifts under the Christmas tree, Carol Mueller knows that money is what counts for her children, now that they have children of their own.
"Grown kids have priorities, from house down-payments to orthodontist bills, and I want to help out to the extent I can," says Mueller, a retired banker.
Like many comfortable parents who saw the family home and retirement savings soar in value for 30 years, Mueller worked with a financial planner to draft a "gifting" program to help her children and ease the tax bite on her estate.
Taxpayers can give each child or anyone else up to $10,000 this year without owing gift tax. And gifts cut the eventual taxable value of an estate.
Starting Jan. 1, and for 10 years thereafter, the tax cut bill President Bush signed in June gradually changes the gift and estate tax rules.
In 2002, for instance, the gift limit rises to $11,000 a taxpayer, or $22,000 for couples, while estates worth up to $1 million will be free of federal inheritance tax next year, up from $675,000 now.
Larger gifts owe federal gift tax, but donors don't pay until they use up their lifetime exclusion, which rises from $675,000 to $1 million next year.
Many tax advisers still recommend giving yearly gifts because of the uncertainty surrounding the phase-out of estate taxes by 2010. "Estate taxes have been part of wartime financing since the Civil War, and the post-Sept. 11 war on terrorism makes full repeal look less likely," notes Brent Lipschultz, a personal financial planner with KPMG, an international accounting and consulting firm.
Estate planning aside, you can reap tax benefits by giving stocks and bonds to a child. At the same time, you give the youngster a financial head start:
- Give a child stock that pays dividends, and you cut your income in future years. You also may qualify for a range of tax breaks tied to income. If you give $10,00 in stock in the expectation it will appreciate 15 percent a year over 25 years, you also have removed an asset that would have grown to $329,000 in your estate.
- Youngsters 14 and older likely qualify for the 10 percent income bracket created by the new tax law. Thus, any income tax your child owes on investment income likely is less than yours. (Children under 14 with more than $1,500 investment income pay at their parents' rate.)
- Another tax advantage of giving stock is a new, low capital gains rate for assets acquired in 2001 or thereafter and held at least five years. Thus, a child in the 10 percent bracket would owe 8 percent capital gains tax on profits from stock when it's sold, not the 20 percent a parent likely would pay. Even better, give stock or a mutual fund to a child, and the holding period includes the time you owned the stock, so a 17-year-old who cashes in next year to cover college tuition gets the lower rate if you held the stock for four years.
One last gift that keeps on giving is a Roth IRA. Tax experts Harold Apolinsky and Stewart Welch, authors of "New Rules for Estate and Tax Planning," call this a "true power play" that can build a six-figure nest egg.
You and others including the child can contribute up to $2,000 in after-tax dollars to a Roth for 2001 so long as the child earned some income this year from baby-sitting, mowing lawns or an after-school job.
Roth contributions will rise to $3,000 next year and $5,000 by 2008.
Every cent invested is tax-free while the account grows and when the money is withdrawn once that child turns 59 1/2.
One caveat: Once you give someone cash or other financial gift, tax-free or not, you no longer control how it's spent. So if you have a wild child prone to fast company and cars, think before you "gift" money to keep it away from Uncle Sam.