At year-end the mind turns to gifts — often money gifts. Children and grandchildren might be on your list. Charities also make heavy pitches in December, sweetened with a sugar topping of tax deductions. Here are some ideas to think about while you have your checkbook open:
Gifts from your individual retirement account. Congress canceled the provision that let you give IRA money to charity tax-free. Now you have to pay income tax on the withdrawal. But if you'll be taking the required minimum distribution, think about charities anyway. The gift is tax-deductible, which partly offsets the tax you'll owe. Some charities also can pay you an income for life.
Gifts to children and grandchildren. You need no advice when you're popping $20 into a card for your granddaughter or writing your son a $100 check. If you're considering something larger, you can give up to $13,000 gift-tax-free to each of as many people as you want this year ($26,000 for married couples).
If you want to help your grandchildren with the cost of higher education, I have two suggestions that carry tax advantages.
Start a 529 college savings plan in your name, with your grandchild as beneficiary. You can invest as little as $15 to $25 a month in various types of mutual funds, for long-term growth. The grandchild gets the money tax-free for higher education. If your state has an income tax, you may be able to deduct part or all of your gift on your state tax return.
Money in grandparent 529s isn't counted on the federal college aid form, so — in the first year — it won't reduce any government aid the child qualifies for. In subsequent years, withdrawals from the plan count as student resources. That might reduce aid, but cash from your 529 still leaves the student better off. You can start 529s for other future students you want to help, such as a godchild or niece. States run the 529 plans. To hold your costs down, buy from the state directly, not from financial advisers. You can find the direct-sold plan at SavingForCollege.com.
For a super-safe choice, consider Series I (inflation-adjusted) savings bonds, available online at TreasuryDirect.gov. Like other safe investments, they're low payers today — earning an annualized rate of only 2.2 percent. But rates change every six months and increase if inflation rises.
I-bond proceeds can be tax-free if used for tuition. To make this work, however, the bonds have to be bought in the name of the parent, not the grandparent. So give the money to your adult child and let him or her make the purchase.
This year, for parents cashing in the bonds, the full tax break went to singles reporting income up to $72,850; then it gradually phased out, ending for singles at $87,850. For couples the range is $109,250 to $139,250. These limits rise annually with inflation. Most families will find that they qualify.