Giving money is a great feeling. Whether you give money in cash, through a check or through another form such as gift cards, the money you give can have a profound effect on to the recipients.
Different situations require different methods, which we will detail below. First, however, you should make sure that your gifts follow the rules of the Internal Revenue Service (IRS).
Giving money can be a tricky endeavor. The details of gift tax rules can be found in IRS Publication 559, but we will not bore you with the full IRS document. Instead, here is what you need to know in most cases.
The IRS always assumes a gift is taxable, unless it falls into one of these non-taxable gift categories, as stated in Publication 559:
- Tuition or medical expenses that are paid directly to an educational or medical institution for someone else
- Gifts to your spouse
- Gifts to a political organization for its use
- Gifts to charity, and
- Gifts that are not more than the annual exclusion for the calendar year, except for future interests.
The annual exclusion is $14,000 for both 2014 and 2015. Annual exclusion is determined based on each individual to which you make a gift. You and your spouse each get a separate annual exclusion, which means that you can jointly give up to $28,000 to one person without having to file a gift tax return (assuming each spouse gifts $14,000).
Many more rules to these taxes exist, but the basics above will cover the vast majority of gifts made. If you feel you may have a taxable gift, please contact your tax professional.
The easiest way to gift money is handing over cash. Almost everyone has quick access to cash and everyone accepts cash, so it can be spent anywhere.
Cash can be given in many fun ways, so be creative with a unique presentation, rather than simply putting cash in a birthday or holiday card. Create a scavenger hunt for the money, or insert the money into many boxes inside of each other, each shrinking in size. Think out of the box, so to speak.
Cash has downsides too, though. Sending money through the mail is generally frowned upon because criminals can easily steal it straight from your mailbox.
At the same time, most people do not see cash as a very meaningful present. Luckily, better options are available.
Gift cards allow you to put a bit of thought into your present, as you must consider the recipient's tastes, interests and habits before purchasing a gift card. If a monetary gift is given through a thoughtful gift card, the beneficiary may not consider it quite as tacky as cash often seems.
The downsides of gift cards rival those of cash. Many see them as impersonal. They can also easily be stolen. While you can register gift cards, keep the receipt and write down identifying information to help protect yourself, few people ever do. Be on the lookout for gift cards that require activation fees or other charges.
Personal checks are virtually extinct, but they still have their uses. Gifting is one of them. A personal check allows you to keep a paper trail.
Personal checks can take longer to process, which can be considered another benefit to some. This gives the recipient time to consider how they should use the money, unlike with cash, which they can spend immediately upon receipt.
The most thoughtful way to gift money involves attaching a purpose. The person receiving the money may not follow your wishes, but it is the thought that counts. Some thoughtful purposes could include:
- College education for a family member
- Down payment assistance on a future home
- A child's first car
- Getting someone started with retirement savings at an early age, or
- Digging a family member out of a financial hole.
We all deal with gifting money at multiple points in our lives. Avoid being boring. Add some flare to your cash gifts, have fun with it and make sure to follow the tax rules.