Those who give wisely shall then receive those nice tax benefits

The Ticker

March 25, 1998|By Julius Westheimer

BY MAKING wise gifts, you reduce your tax bill. Some examples:

Maximize tax-free gifts to minor children. You may give $10,000 a year (a married couple can give $20,000), free of the gift tax, to each child or grandchild. These gifts of cash or securities, made over many years, greatly reduce your taxable estate. Gifts also lower your income tax, because dividends and interest go to your children or grandchildren.

Give $2,000 to a child to finance his or her IRA. A child with at least $2,000 of earned income from a summer job, for example, can make a $2,000 tax-deductible IRA contribution. Tax Hotline says, "The IRA can be funded with gifts, allowing the youngster to save the earned income and get a future security head start with tax-deferred compound returns."

Here's the arithmetic: If an IRA earns 8 percent, a child who contributes $2,000 each year starting at age 18 for only 10 years -- and never puts in another nickel -- will have as much money at retirement as one who starts making $2,000 contributions at 26 and does so every year until he or she stops working.

In addition, give appreciated stocks, not cash, to charity. David Rhine, CPA, says, "Donate 'big-profit' stocks to charity, get a deduction for the shares' value and never pay capital gains tax. If you donate cash and keep the appreciated assets, you will still have a future gains tax."

Pay tuition for a child or grandchild by making the payment directly to the college; these payments are free of the gift tax. The IRS says you may make tuition payments for family members and still use your annual gift tax exclusion to make additional $10,000 gifts.

Give appreciated stocks to a child age 14 or over and have the child sell them instead of selling them yourself. The child benefits from his or her low tax rate, compared with a higher capital gains tax you would pay. This strategy makes sense if you spend the proceeds on the child's behalf, such as on college tuition.

TAX TIPS: Starting this year, you may deduct a full $2,000 IRA contribution for a spouse who is not covered by a company pension plan, even if you are covered by such a plan, as long as your joint adjusted gross income is less than $100,000.

Mutual funds that buy a lot of high dividend-paying stocks lTC should be kept in tax-exempt accounts, because dividends are passed through to fund shareholders and are taxed at ordinary income rates of up to 39.6 percent.

Pub Date: 3/25/98

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