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Year End Tax Strategies Pt. 4: Education & Charity

(posted: December 28th, 2015)


As you end the year and start to think about tax season ahead, we've got some tips and ideas for all you planners out there.

This is the fourth and final post in our year end tax series.

Here we offer a couple of savings options and some tips on gifting that might work for you, depending on your situation.

Education: Two Tax-preferred Savings Plans

Coverdell Education Savings Accounts
If you're eligible, for 2015 you can contribute up to $2,000 to a Coverdell account on behalf of a child. Contributions grow tax-free and qualified K-12 and higher-education-related withdrawals are also tax-free. You have until next April 15 to contribute for income-tax purposes, but if you make the contribution by December 31, it will count as a gift for this year instead of next year for gift-tax purposes.

State-sponsored 529 Plans
Regardless of income level, anyone can contribute up to $70,000 (or $140,000 for married couples) to a 529 plan in 2015 without incurring gift taxes, but only if you have the gift treated as though it were made over five years. Because you don't have to invest in your own state's plan, we recommend that you shop around, especially if you live in a state with no deduction (such as California) or one with no state income tax. If your state offers an income tax deduction on in-state 529 plan contributions, make your contribution by December 31. However, if you invest in an out-of-state plan, you may lose tax benefits offered by your state's plan.

Giving: Four Tips

Gift Before the Year Ends
For 2015, you can give up to $14,000 each to as many individuals as you wish and pay no gift tax. Spouses can "split" gifts for a total of $28,000 per beneficiary, per year. Gifts beyond that are taxable, but only if they exceed the lifetime gift tax exemption of $5.43 million over a donor's life. As for the lucky recipient, they'll owe no gift or income tax and don't even have to report the gift unless it comes from outside the United States.

Pay School or Medical Bills for Another
You can make unlimited payments directly to medical providers or educational institutions on behalf of others without incurring a taxable gift or dipping into your $5.43 million lifetime gift-tax exemption.

Shift income to children
Consider gifting appreciated securities and stocks whose dividends are taxed at low long-term capital gains rates to children, at least to the extent that the "kiddie tax" will not apply.

Give appreciated securities to charities
Donate appreciated securities that you've held for more than a year for a full fair market value deduction and no capital gains tax. On the other hand, if you're holding securities at a loss, sell them first and then donate the cash. That way, you can claim the capital loss on your tax return.

This post is part of our series on steps you can take at the end of the year to make tax time easier. The Year End Tax Strategies series includes:

As always, if you need help or wonder if any of these strategies is right for you, please Contact Us!

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