Kirk and Pam email: Our son is getting married in August of 2014 and my husband and I would like to give our son and future daughter-in-law some money toward the wedding, honeymoon or future home. We are not sure how much money we can give them without having to pay tax fees.
In 2013 the IRS gift tax exclusion is $14,000 per donor per recipient. So effectively, married couples can — together — provide cash gifts of up to $28,000 per recipient without triggering a gift tax. So in your case, you and your spouse can give a combined gift of up to $56,000 this year to your son and future daughter-in-law ($28,000 to each). As long as your gift is at our below that threshold you don’t have to worry about filing a gift tax return. Recipients never need to pay income tax on the gifts, a common misconception.
If you and your wife give any one recipient more than $28,000 (or if just one of you gifts more than $14,000 to a single recipient), the IRS requires each donor who exceeded the limit to fill out tax form 709, the U.S. Gift Tax Return, by the tax deadline of the following year. You have to state by how much you gifted beyond the exemption and subtract that amount from your lifetime exemption of $5.25 million. This doesn’t mean you’ll owe any money right now. If in your lifetime you give away more than $5.25 million you’ll be subject to a federal gift tax, currently 40%.
That said, if you want to contribute to your son’s wedding expenses directly — and it’s an amount that exceeds the annual gift limit — there is a way around the gift tax. If documented properly, you can pay for the chapel, cake, reception and flowers directly to the vendors. And if it’s more than $56,000, it can be excluded as a gift, as long as it's all documented properly, says Joshua Jenson, a CPA in Edmond, Okla.
Lindsay emails: I'm a 28-year-old teacher and have been paying into my school district's pension since I was 22. I contribute 7% of my income. According to benefits estimators online, I will stand to clear about $5,000 per month before taxes, assuming I retire at 62 and the pay structure remains the same. So the question is, how much should I be saving for retirement on my own? I do have a Roth IRA and a few months' expenses in an emergency fund.
Lindsay: I’m all for diversification — and not just when it comes to picking investments within a portfolio. I think having a wide range of retirement savings vehicles is a smarter bet than putting all your savings in a single pension plan. This way, if that pension is mismanaged or goes belly-up, you can (at least in theory) rely on other retirement funds to offset potential losses there. Having $5,000 a month before taxes may seem like a lot to you today, but when you factor in future retirement costs, inflation and taxes, you may not be left with enough, as so many current retirees are now realizing the hard way. Check out the retirement cost calculator at ChoosetoSave.org to run some important numbers and get a better sense of your retirement needs.
It’s great to know that you have a Roth IRA as a supplement. Try to invest up to the maximum every year (it’s $5,500 this year). The advantage of a Roth IRA is that you can make qualified withdrawals during retirement tax-free. As a teacher, you may also have access to a 403(b) retirement plan, another great savings instrument that allows you to save up to $17,500 a year tax-deferred.
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