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Investing in your grandchildren's future can offer them a range of benefits:
While these benefits are wonderful, it’s important to consider the tax implications that may arise, both for you and for your grandchildren.
One of the first things to understand is the gift tax. The IRS allows you to gift up to a certain amount each year to an individual without incurring a gift tax. As of 2024, this annual exclusion amount is $18,000 per recipient. This means you can invest up to $18,000 for each grandchild without worrying about gift taxes. If you’re married, you and your spouse can each gift $18,000, doubling that amount to $36,000 per grandchild per year.
Anything above this exclusion could be subject to gift taxes, but don’t worry just yet! There’s also a lifetime exemption amount that can offset this, which in 2024 is $13.61 million. This means you can give significant amounts over your lifetime without incurring taxes, but it’s always wise to keep track of your giving, especially because this lifetime exclusion applies to both gift and estate tax (meaning that it's an overall limit for the amount an individual can transfer to another individual tax-free via gifting during their lifetime or at death through their estate). In the event you gift more than the annual exclusion amount, you'll just need to file IRS Form 709 (Gift Tax Return) to report the gift and deduct the excess gift amount from your lifetime exemption.
One of the best ways to manage tax liabilities is by using tax-advantaged accounts. These accounts offer various benefits, and knowing which one suits your needs can make a big difference.
If your grandchild is under 18 (or under 24 if a full-time student) and has unearned income (such as interest, dividends, or capital gains from investments), the Kiddie Tax rules apply. Under these rules, unearned income over a certain threshold ($2,500 for 2024) is taxed at the parent's tax rate instead of the child’s, which could be significantly higher.
This is an important consideration when investing large sums in your grandchild’s name. Balancing the investment types and the income they generate can help manage the impact of the Kiddie Tax.
Investing in your grandchildren's future is a wonderful gesture that can provide them with financial stability and opportunities. However, it's crucial to understand the tax implications to ensure that your generosity is maximized without unintended tax burdens.
By carefully planning your investments, considering tax-advantaged accounts, and understanding the rules around gift taxes and the Kiddie Tax, you can confidently set your grandchildren on a path to a bright financial future. Remember, it’s always a good idea to consult with a tax professional or financial advisor who can help tailor an investment strategy that meets your goals and adheres to tax regulations.
Your love and foresight in planning for your grandchildren’s future are invaluable, and with the right approach, you can make sure that every dollar you invest works as hard for them as you do.