How to Give the RIGHT Way

April 29, 2015

December is associated with giving gifts to loved ones, but often May and June are months where significant milestones like graduations and weddings occur. If you are making a gift of cash, there are a few questions you might want to ask yourself. How much is enough, how much is too much, and what’s the best way to give?

There is no set dollar amount for a gift that makes it enough, but there are tools that can help you figure out how much of an impact your gift may make on your benefactor. For example, if you are giving money to help someone with paying for college, use this Education Savings Calculator to figure out how much of their education you can fund. If you are helping someone with a wedding, honeymoon, or down payment on a house, you can do the same thing with this Saving for Goals Calculator.

When giving a gift, there are a few things you may want to avoid. For example, is your generosity hindering their willingness to save? Sometimes giving too much enables the recipient to rely on others, so keep that in mind when making a gift.

If you are concerned about creating dependency, maybe a loan is the best way to help. I had a friend who needed a newer vehicle but did not have good credit, so I provided a personal loan. Just be sure to draft a loan agreement and set up terms for repayment. If you don’t want to hassle with collection and your borrower has decent credit, consider using a peer-to-peer lending site. Through these sites, they can apply for the loan and you can “fund” it as an investor.

Another concern may be gift taxes. [As a side note, gifts can be in any form for gift tax purposes. The most popular is cash, but a gift can also be a gift of stock, real estate, and other forms of property such as a car.] You can make unlimited gifts to anyone by directly paying a doctor, hospital, or facility for a medical bill or a college, university, or private school for a tuition bill.

In addition, you can give up to $14,000 per person, per year to as many people as you want. (Full disclosure: I gladly accept gifts from strangers.) If you are married, you may split your gift with your spouse so that each of you is gifting $14,000 a piece or a total of $28,000 combined. The popular 529 college savings plan has a special provision that allows a contributor to spread their gift to a 529 account over five years, so you could gift up to $70,000 to a 529 account without incurring a gift tax liability as long as you don’t contribute over the next four years! If you give more than that, you can still avoid gift taxes by filing a gift tax return at the end of the year and claiming a portion of your lifetime gift tax exclusion amount.

Finally, here are a couple more tips. If the gift is for a specific purpose such as funding a housewarming gift or a honeymoon, consider purchasing a gift card. If you’re giving money for a down payment on a home, be sure to prepare a gift letter so that your beneficiary can show their lender proof of the origin of the funds. Whether it’s walking across the stage or down the aisle, now you’re ready for the “other” gift giving season.