Financial Gifts For The Holidays

Holiday shopping can be ridiculously hard. Either the item they want is one everybody wants and it’s been out of stock for months or they’ve already bought it for themselves. Other times, there are gift cards that you worry are gathering dust on a counter somewhere. How many years in a row is it acceptable to buy a lavender-scented candle?

Physical items for the holidays are nice, but sometimes the best gift you can give someone is an investment in their future. Let’s talk financial gifts.

If you’re giving someone a financial gift, this tends to work best if you’re close to the person and know what their short- and long-term goals are. If you have an understanding of that, it will put you in the best position to help.

In a minute, we’ll cover just a few options that may make sense depending on who the gift is for and the stage of life in which they find themselves. But before we get there, let’s talk about the tax implications of gifting.

There are two things that are sure every year: Christmas and the tax collector are both coming. If you’re giving a gift, it’s your responsibility as the gift giver to pay any taxes that might be due on the gift. However, there are some things you should know that can help most people avoid paying taxes.

To begin with, for the purposes of tax liability, gift tax is tied in with estate tax. That means limits on estates you pass on are affected by gifts you give over the course of your lifetime as well. The good news is that the amount you can exclude from tax liability is fairly high. The limit is $11.7 million for 2021 and $12.06 million in 2022. If you’re a couple, you can double these numbers.

You can also exclude gifts up to $15,000 from tax liability altogether because these don’t have to be reported. That limit increases to $16,000 for the 2021 tax year. Gifts above that amount count toward your tax liability and need to be reported to the IRS. However, the good news is that for most of the American public, they won’t need to worry about paying taxes on the gifts.

Now that we’ve gone over some of the basic parameters of financial gift giving, let’s touch on some popular gifts in the financial realm.

Bonds

One thing people will sometimes do when children are born or for other momentous occasions in a young person’s life is give savings bonds. These are really cool because it can be a relatively modest amount of money, but you’re making an investment in someone’s future.

You could buy corporate bonds, but that relies on the company remaining in good shape for the term of the bond. If you don’t want to take that risk, you can buy U.S. Treasury bonds. The government doesn’t like to bounce checks.

Treasury bonds are purchased mainly online now. In order to give a bond, both you and the person getting the gift have to have a Treasury Direct Account. Parents or legal guardians can set one up on behalf of their children.

Bonds can be purchased for as little as $100 or in increments of $100 above that. They mature over 20 or 30 years with interest being paid every 6 months. On the maturity date, the bond holder can get the full value of the bond, but they can also be cashed out before then if the recipient chooses.

College Fund

Alternatively, you can also set up an education fund for a young child. While often used for college, these can be used for tuition expenses at a variety of institutions. The advantage of these programs is that the earnings are tax-free in the account. Earnings also don’t count as taxable income for the beneficiary in most cases.

There are some fairly specific IRS guidelines around this, so make sure to read them. If you have any problems, don’t hesitate to work with a professional.

These 529 plans are set up by or on behalf of a state. Some are straight money savings vehicles. Others allow you to buy prepaid tuition credits at today’s prices for qualifying state universities.

Gift Down Payments

So far, we’ve talked about children, but adults like getting gifts to, particularly when they’re saving for a big expense like a house. The good news is it’s doable for a third-party to contribute to the down payment of a relative or even an employee depending on the type of loan they’re qualifying for.

In fact, if your gift recipient is getting a primary residence that’s a single unit, you can cover the entire down payment if you want. There is no minimum client contribution if your family member works with Rocket Mortgage^®. Different lenders may have different policies. Additionally, there is a minimum contribution depending on the size of your down payment if it’s a multiunit property or second home.

Lenders will require a gift letter. Gift letters confirm several pieces of information, but among the most important is that the gift is actually a gift. The letter has to explicitly state that the money doesn’t have to be paid back.

Lenders might also require documentation showing the transfer of funds. A Home Loan Expert will be able to go over what’s required with you.

If you’re looking for a different and more meaningful gift for someone close to you this holiday season, a financial investment in someone’s future can really be appreciated for years to come. Before going through with this, just make sure you understand what the short- and long-term goals of the person you’re giving the gift to so you can best support that.

Three great financial gifts to give are savings bonds, college funds and gift down payments. If you’re unsure of an option that would work best for the situation of you and your loved ones, work with them and don’t hesitate to consult a financial advisor. If you’re looking for more, read up on long-term investments.