Not all gifts are taxable.
 
I’d like for you to meet my friend, Hugh. He’s a retired film stuntman who, after a long career, is enjoying his retirement. Some of what he’s enjoying about his retirement is sharing part of his accumulated wealth with his family, specifically his wife and two sons. Like many Americans, Hugh likes to make sure that, when he’s sharing that wealth, he isn’t giving the I.R.S. any overtime.
 
Hugh knows about the gift tax and knows how to make those gifts without running headlong into a taxable situation. This is Hugh’s responsibility because the I.R.S. puts the onus on the giver. If the gift is a taxable event and Hugh doesn’t pay up, then the responsibility falls to the beneficiaries after he passes in the form of estate taxes. These rules are in place so that Hugh can’t simply, say, give his entire fortune to his sons before he dies.
 
Exemptions for family and friends. It would be different for Hugh’s wife, Barbara. The unlimited marital deduction means that gifts that Hugh gives to Barbara (or vice versa) never incur the gift tax. There’s one exception, though. Maybe Barbara is a non-U.S. citizen. If so, there’s a limit to what Hugh can offer her, up to $155,000 per year. (This is the limit for 2019; it’s pegged to inflation.)
 
The gift limit for other people is $15,000 and it applies to both cash and noncash gifts. So, if Hugh buys his older son Tony a $15,000 motorcycle, it’s the same as writing a $15,000 check to his younger son, Jerry, or gifting $15,000 in stock. Spouses have their own separate gift limit, as well; Barbara could also write Jerry a $15,000 check from the account she shares with Hugh.
 
Education and healthcare. The gift tax doesn’t apply to funds for education or healthcare. So, if Tony breaks his leg riding that motorcycle, Hugh can write a check to the hospital. If Jerry goes back to college to become a chiropodist, Hugh can write a tuition check to the college. This only works if Hugh is writing the check to the institution directly; if he’s writing the check to the beneficiaries (i.e. Tony and Jerry), he might incur the gift tax.
 
The Lifetime Gift Tax Exemption. What if Hugh were to go over the limit? The lifetime gift tax exemption would go into effect, and the rest would be reported as part of the lifetime exemption via Form 709 come next April. Unlike the annual exemption, the lifetime exemption is cumulative for Hugh. Currently, that lifetime exemption is $11.4 million.
 
Being a stuntman and an active extreme sportsman, Hugh is concerned about his estate strategy. Were he to borrow Tony’s motorcycle and attempt to jump the Snake River Canyon, what would happen if he didn’t make it across? If that unfortunate event occurred in 2019, and he gave $9 million over his lifetime, and his estate and all of that giving totaled more than $2.4 million, the estate may owe a federal tax and possibly a state estate tax. Barbara would have her own $11.4 million lifetime exemption, however, and since she is the spouse, estate taxes may not apply.
 
Any wise stuntman will tell you, “leave this to the experts.” Talk to a trusted financial professional about your own plans for giving.

What are your options? What are the benefits?
 
If you own an Individual Retirement Account (IRA), perhaps you have heard about Roth IRA conversions. Converting your traditional IRA to a Roth IRA can make a lot of sense depending on your situation. But remember, consulting with your financial advisor before making financial decisions is never a bad idea. Ready to learn more? Read on.  
  
Why go Roth? There is a belief behind every Roth IRA conversion that future income tax rates will be higher. If you are one of the believers, then you may be compelled to convert. After all, once you are age 59½ and have had your Roth IRA open for at least five calendar years, withdrawals of the earnings from your Roth IRA are exempt from federal income taxes. You can withdraw your Roth IRA contributions tax free and penalty free at any time.
 
As the law is currently written, you never have to make mandatory withdrawals from a Roth IRA, and if your income permits, you can make contributions to a Roth IRA as long as you live.
  
Currently, if your filing status is married and your adjusted gross income (AGI) is $193,000 or less you can contribute a maximum of $6,000 to your Roth IRA – $7,000 if you’re age 50 or older. The maximum contribution is also available to single filers with an AGI of $122,000 or less. Depending on how high your AGI is, the amount you are able to contribute may change. Consult with your financial advisor to discuss the latest limitations and potential contributions for your situation.
  
Why not go Roth? Two reasons: the tax hit could be substantial, and time may not be on your side.
  
A Roth IRA conversion is a one-time taxable event. The I.R.S. regards it as a payout from a traditional IRA prior to that money entering a Roth IRA, and the payout represents taxable income. That taxable income stemming from the conversion could send you into a higher income tax bracket in the year when the conversion occurs.
  
If you are nearing retirement age, going Roth may not be worth it. If you convert a large traditional IRA to a Roth when you are in your fifties or sixties, it could take a decade (or longer) for the IRA to recapture the dollars lost to taxes on the conversion.
  
In many respects, the earlier in life you convert a regular IRA to a Roth, the better. Your income should rise as you get older; you will likely finish your career in a higher tax bracket than you were in when you were first employed. Those conditions relate to a key argument for going Roth: it is better to pay taxes on IRA contributions today than on IRA withdrawals tomorrow.
  
On the other hand, since many retirees have lower income levels than their end salaries, they may retire to a lower tax rate. That is a key argument against Roth conversion.      
   
You could choose to “have it both ways.” As no one can fully predict the future of American taxation, some people contribute to both Roth and traditional IRAs – figuring that they can be at least “half right” regardless of whether taxes increase or decrease.
   
If you do go Roth, your heirs may receive a tax-free inheritance. Lastly, Roth IRAs can prove to be very useful estate planning tools. If I.R.S. rules are followed, Roth IRA heirs may end up with a tax-free inheritance, paid out either annually or as a lump sum. In contrast, the distributions of inherited assets from a traditional IRA are routinely taxed.

If you want a tax break and want to help a nonprofit, this may be a good move.
 
Have you ever wanted to make a major charitable gift? Would you like a significant federal tax break in acknowledgment of that gift? If so, an IRA charitable rollover might be a good option.
 
If you are age 70½ or older and have one or more traditional IRAs, you may want to explore the potential of this tax provision. In the language of federal tax law, it is called a Qualified Charitable Distribution (QCD) – a direct transfer of up to $100,000 in IRA assets to a qualified charity.
 
An IRA charitable rollover may help you lower your adjusted gross income (AGI). That may be a goal in your tax strategy, especially if your AGI is large enough to position you for increased Medicare premiums, greater taxation of your Social Security benefits, or exposure to the 3.8% investment income tax and the Medicare surtax.
 
Up to $100,000 may be excluded from your gross income during the year in which you make the gift. The gifted amount also counts toward your Required Minimum Distribution (RMD).
 
By the way, this $100,000 annual QCD limit is per individual taxpayer. If you are married, you and your spouse may gift up to $200,000 in a year through IRA charitable rollovers. Imagine lowering your household’s AGI by as much as $200,000 in a tax year.

The Internal Revenue Service will not let you claim the amount of a QCD as a deduction on Schedule A. (That would amount to a double tax break.)
 
You need not be rich to do this. When many people first learn about the IRA charitable rollover, they think it is only for multimillionaires. That is a misconception. Even if you do not think of yourself as wealthy, a QCD could prove a significant element in your tax strategy.
  
How does it work? Logistically speaking, an IRA charitable rollover has to unfold in a certain way. The custodian or trustee overseeing your IRA must either make the gift to the charity for you or give you a check made payable to the charity for the amount of the gift.
 
Do not simply take a distribution from your IRA and then write a check to the charity. That does not qualify as a QCD. If you make this mistake, the money you have taken out of your IRA will simply be included in your gross income for the year, and you may not even be able to claim a charitable contribution deduction for your efforts.
 
An IRA owner must be age 70½ or older to do this; the gifted assets must come from an IRA, or multiple IRAs, and are subject to RMD rules. (SEPs and SIMPLE IRAs are ineligible if an employer contribution has been made for the particular year.)
   
The charity or nonprofit involved must pass muster with the I.R.S. It must be a public charity eligible for charitable contribution deductions; that is, it must qualify as 501(c)(3) eligible. It cannot be a donor-advised fund or a private foundation. The charity should provide you with a letter of acknowledgement of your gift, for federal tax purposes. If that letter is not quickly sent to you, be firm in requesting it. It should state that you have received no gift, reward, or benefit from the charity in exchange for your contribution.
 
If you pledge a donation to a qualified charity or nonprofit, an IRA charitable rollover can be used to satisfy your pledge.
 
This tax break has been a boon to charities and IRA owners alike. Correctly performed, a charitable IRA rollover may help to lessen tax issues while benefiting qualified nonprofit organizations. 

Are you aware of them?
 
The federal government offers some major tax breaks for older Americans. Some of these perks deserve more publicity than they receive.
       
If you are 65 or older, your standard deduction is $1,300 larger. Make that $1,600 if you are unmarried. Thanks to the passage of the Tax Cuts & Jobs Act, the 2018 standard deduction for an individual taxpayer at least 65 years of age is a whopping $13,600, more than double what it was in 2017. (If you are someone else’s dependent, your standard deduction is much less.)
    
You may be able to write off some medical costs. This year, the Internal Revenue Service will let you deduct qualifying medical expenses once they exceed 7.5% of your adjusted gross income. In 2019, the threshold will return to 10% of AGI, unless Congress acts to preserve the 7.5% baseline. The I.R.S. list of eligible expenses is long. Beyond out-of-pocket costs paid to doctors and other health care professionals, it also includes things like long-term care insurance premiums, travel costs linked to medical appointments, and payments for durable medical equipment, such as dentures and hearing aids.
 
Are you thinking about selling your home? Many retirees consider this. If you have lived in your current residence for at least two of the five years preceding a sale, you can exclude as much as $250,000 in gains from federal taxation (a married couple can shield up to $500,000). These limits, established in 1997, have never been indexed to inflation. The Department of the Treasury has been studying whether it has the power to adjust them. If modified for inflation, they would approach $400,000 for singles and $800,000 for married couples. 
 
Low-income seniors may qualify for the Credit for the Elderly or Disabled. This incentive, intended for people 65 and older (and younger people who have retired due to permanent and total disability), can be as large as $7,500 based on your filing status. You must have very low AGI and nontaxable income to claim it, though. It is basically designed for those living wholly or mostly on Social Security benefits.
 
Affluent IRA owners may want to make a charitable IRA gift. If you are well off and have a large traditional IRA, you may not need your yearly Required Minimum Distribution (RMD) for living expenses. If you are 70½ or older, you have an option: you can make a Qualified Charitable Distribution (QCD) with IRA assets. You can donate up to $100,000 of IRA assets to a qualified charity in a single year this way, and the amount donated counts toward your annual RMD. (A married couple gets to donate up to $200,000 per year.) Even more importantly, the amount of the QCD is excluded from your taxable income for the year of the donation.
   
Some states also give seniors tax breaks. For example, the following 11 states do not tax federal, state, or local pension income: Alabama, Hawaii, Illinois, Kansas, Louisiana, Massachusetts, Michigan, Mississippi, Missouri, New York, and Pennsylvania. Twenty-eight states (and the District of Columbia) refrain from taxing Social Security income.
   
Unfortunately, your Social Security benefits could be partly or fully taxable. They could be taxed at both the federal and state level, depending on how much you earn and where you happen to live. Whether you feel this is reasonable or not, you may have the potential to claim some of the tax breaks mentioned above as you pursue the goal of tax efficiency.

Perhaps both traditional and Roth IRAs can play a part in your retirement plans.

IRAs can be an important tool in your retirement savings belt, and whichever you choose to open could have a significant impact on how those accounts might grow.
 
IRAs, or Individual Retirement Accounts, are investment vehicles used to help save money for retirement. There are two different types of IRAs: traditional and Roth. Traditional IRAs, created in 1974, are owned by roughly 35.1 million U.S. households. And Roth IRAs, created as part of the Taxpayer Relief Act in 1997, are owned by nearly 24.9 million households.
 
Both kinds of IRAs share many similarities, and yet, each is quite different. Let's take a closer look.
 
Up to certain limits, traditional IRAs allow individuals to make tax-deductible contributions into the retirement account. Distributions from traditional IRAs are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty. For individuals covered by a retirement plan at work, the deduction for a traditional IRA in 2019 has been phased out for incomes between $103,000 and $123,000 for married couples filing jointly and between $64,000 and $74,000 for single filers.
 
Also, within certain limits, individuals can make contributions to a Roth IRA with after-tax dollars. To qualify for a tax-free and penalty-free withdrawal of earnings, Roth IRA distributions must meet a five-year holding requirement and occur after age 59½. Like a traditional IRA, contributions to a Roth IRA are limited based on income. For 2019, contributions to a Roth IRA are phased out between $193,000 and $203,000 for married couples filing jointly and between $122,000 and $137,000 for single filers.
 
In addition to contribution and distribution rules, there are limits on how much can be contributed to either IRA. In fact, these limits apply to any combination of IRAs; that is, workers cannot put more than $6,000 per year into their Roth and traditional IRAs combined. So, if a worker contributed $3,500 in a given year into a traditional IRA, contributions to a Roth IRA would be limited to $2,500 in that same year.
 
Individuals who reach age 50 or older by the end of the tax year can qualify for annual “catch-up” contributions of up to $1,000. So, for these IRA owners, the 2019 IRA contribution limit is $7,000.
 
If you meet the income requirements, both traditional and Roth IRAs can play a part in your retirement plans. And once you’ve figured out which will work better for you, only one task remains: opening an account.

Follow the rules, and you might get a big federal tax break.
    
Is your annual IRA withdrawal a bother? If you are an affluent retiree, that might be the case. The income is always nice, but the taxes that come with it? Not so much.
      
If only you could satisfy your yearly IRA withdrawal requirement minus the attached taxes. Guess what: there might be a way.
    
If you gift traditional IRA assets to charity, you could see some big tax savings. The Internal Revenue Service calls this a Qualified Charitable Distribution (QCD), and you may want to explore its potential. Some criteria must be met: you need to be at least 70½ years old in the year of the donation, the donation must take the form of a direct transfer of assets from the IRA custodian to the charity, and the charity must be “qualified” in the eyes of the I.R.S. Any 501(c)(3) non-profit organization meets the I.R.S. qualification, as do houses of worship.
 
The amount you gift can be applied toward your Required Minimum Distribution (RMD) for the year, and you may exclude it from your taxable income. If you are retired and well-to-do, a charitable IRA gift could be a highly tax-efficient move.
 
Just how much could you save? That depends on two factors: how much you gift, and your federal income tax bracket. As an example, say you are in the 35% federal income tax bracket, and you donate $40,000 from your traditional IRA to a 501(c)(3) non-profit organization. That $40,000 will be gone from your taxable income, and the donation will cut your federal tax bill for the year by $14,000 (as 35% of $40,000 is $14,000). Yes, the savings could be significant.
      
You can donate as much as $100,000 to a qualified charity this way in a single year. That limit is per IRA owner; if you are married, and you and your spouse both have traditional IRAs, you can each donate up to $100,000.
 
What about the fine print? There is plenty of that, and it is all worth reading. You may be curious if you can make a QCD from a SIMPLE or SEP-IRA; the answer is no. You can make a QCD from a Roth IRA, but there is little point in it: Roth IRA withdrawals are commonly tax-free.
      
Regarding the asset transfer, the critical detail is that you cannot touch the money. The distribution must be payable directly to the non-profit organization or charity, not to you. (Income tax does not need to be withheld from the distribution since the amount withdrawn will not count as taxable income.) In addition, your tax preparer must identify the distribution as a QCD on your federal tax return. This is crucial and must not be overlooked, because the custodian of your IRA will probably report your QCD as a normal IRA distribution.
  
If you itemize your deductions, you should know that a charitable IRA gift does not count as a deductible charitable contribution. (That would amount to a double tax break.) Of course, fewer taxpayers have incentive to itemize now, since the standard deduction is so large, thanks to the Tax Cuts & Jobs Act.  
       
If you want to make a charitable IRA gift, start the process before the year ends. If you try to make the gift in late December, your IRA custodian might not be able to move fast enough for you, and the asset transfer may occur later than you would like (i.e., after December 31). Talk with a tax or financial professional before the year ends, so that you can plan a charitable IRA donation with some time to spare.  

By Michael Howell
​
In recent months, you may have read articles highlighting some new and improved benefits to the popular 529 college savings program as a result of the passage of the Tax Cuts and Jobs Act.
 
Specifically, the new tax law has expanded the use of 529 plans, allowing for up to $10,000 per year to be used to pay for tuition at elementary or secondary private and religious schools.
 
At first glance, this expanded flexibility is welcome news. After all, more versatility in most cases is a good thing. Except upon deeper inspection of the changes, the updates are of less value than most people think, especially for those of us living in California (keep reading).

A Quick Primer on 529 Plans
As a quick primer (or reminder) of how 529 plans work, the core benefit of the program is it allows owners to invest money using after-tax dollars toward future education expenses and capture tax-deferred growth. Fast forward to when education expenses come due, and withdrawals are tax-free so long as they're used to pay for qualified education expenses as per the IRS.
 
In other words, you can avoid paying tax on the growth portion of your 529, meaning less money going to Uncle Sam and more money going toward helping your student pay for education expenses.
 
Why the Change Matters
Prior to the new tax law, 529 assets could only be used to pay for college and higher education expenses. In my interactions with parents and grandparents planning for the future, this restricted usage of 529 assets is often one of the primary deterrents to a would-be 529 investor utilizing the program to save for college expenses. In these case, the driving concern is usually over the potential of a student deciding to skip college altogether and the money becoming subject to taxes and penalties.
 
So on the whole, expanding the flexibility of the program by allowing withdrawals to pay for K-12 expenses is undoubtedly an improvement, if ever so slight.
 
The bigger question is whether you should use 529 assets to pay for K-12 expenses?
 
A few words of caution…
 
The Funds Can Only Be Used to Pay for K-12 Tuition
You'll notice in the above primer on 529 plans that I mentioned 529 withdrawals are tax-free so long as they're used to pay for qualified education expenses.
 
Per the federal guidelines, the definition of a qualified education expense now depends on whether your 529 funds are used to pay for college or private K-12 expenditures. If the withdrawal is made to pay for a college bill, qualified expenses include tuition, room and board, books/supplies, and specific technology items like computers. In contrast, withdrawals related to K-12 costs are only applicable toward tuition.
 
As small as this difference may seem, it's significant enough to get someone in trouble. That means no using 529 assets to pay for your high school student's computer, books, or charging them rent for the privilege of living under your roof (as tempting as that may be)!
 
In This World, Nothing is Certain but Death & California State Taxes
Remember how I mentioned that 529 withdrawals are tax-free if they're considered qualified education expenses? Well, they're only tax-free if we're talking about federal tax and if the state you reside in follows the same federal guidelines.  
 
Unfortunately for Californians, if a parent withdraws money out of a 529 plan to pay for K-12 expenses, it will be considered a non-qualified distribution for California tax purposes. Without getting too technical here, this means that a portion of any 529 distributions used to pay for K-12 expenses would still be tax-free for federal tax purposes, but would be considered "taxable earnings" for California state tax purposes. Also, the taxable portion of any non-qualified 529 distributions would be subject to a premature 2.5% withdrawal penalty in California.
 
When the purpose of putting money away in a 529 in the first place is for the tax-advantaged growth potential, this should be a deal breaker for most Californians, at least for now. Should Sacramento decide to update and adopt the federal guidelines at a later date, this would make the benefit worth considering.

​Consider the Trade-Off
Lastly, consider the trade-off of using 529 assets to pay for secondary or high school expenses. At its most practical level, dollars used to pay for private K-12 schooling will mean fewer dollars available to help pay for college expenses. Not to mention, dollars withdrawn early from a 529 are no longer invested and compounding over time, which means less money for college and a lower tax benefit.
 
Remember the primary tax benefit of a 529 plan is tax-free growth. A 529 plan with an investment held for 3-5 years has far less growth potential than an investment held for 15-20 years. So any tax benefit that would come from using 529 funds to cover private K-12 expenses would be negligible at best because the investments just aren't given as much time to compound and grow.
 
This is why investing early in a 529 plan when a child is a baby makes so much sense. An investment timeline spanning nearly two decades can allow for a more aggressive investment plan. The longer the assets remain in the plan, the higher the growth potential and tax benefit over time.

So in this advisor's opinion – if paying for private school is important to you, you're better off utilizing your cash flow and other means to pay for tuition expenses.

​If you're using a 529 plan to save for college—my advice is to save early, save often, and hear the whispered words of wisdom in Paul McCartney and "Let it Be!"

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
 
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.