Tax implications of giving big to family members for the holidays
The holiday season often reminds people of how lucky they are to be surrounded by friends and family members, and many choose this time of year to help their loved ones achieve large life goals. However, when it comes to helping children purchase a home or sending grandchildren to college, many don't have the cash readily on hand. To give a helping hand, some individuals make early withdrawals from their individual retirement accounts to provide financial assistance to loved ones or simply make large withdrawals from their savings accounts. As with any type of big monetary gift, however, it's important to note the tax implications.
Individuals who take money from a traditional savings account are allowed to gift up to $13,000 - or $26,000 if married filing jointly - to friends or family without incurring a tax penalty. Those who are gifting a great deal of cash may consider waiting until the start of the new year, as this gift allowance increases to $14,000, or $28,000 for couples filing jointly.
Americans who plan to tap into their traditional IRA to provide financial assistance to family members will need to understand the scenarios and guidelines for doing so without incurring penalties. Typically, those who access their IRAs before age 59 1/2 will have to pay income tax and a 10 percent early withdrawal penalty. There are certain instances in which investors can avoid the 10 percent penalty when making early withdrawals, although they may still be subject to income taxes.
Helping loved ones achieve life goals
Investors are allowed to withdraw up to $10,000 from their IRA for the purchase of a first-home. This includes buying, building or rebuilding a first-home. The good news is that these funds can be handed over to a spouse, children, grandchildren or parents if they are first-time homeowners. The IRS classifies a first-time homebuyer as someone who has not had any interest in a main home for two years before the new home was acquired.
Many individuals want to see their spouse, children or grandchildren succeed in education as well. Investors can make early IRA withdrawals to cover qualifying education expenses for these individuals as well, which include tuition, fees, books, supplies and course equipment. Room and board costs may also qualify if individuals are at least a half-time student.
Individuals must strictly adhere to the rules governing these withdrawals to avoid IRA penalties, so it may be best to allow a tax preparer to set up the transaction.
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