Ken Clark, CFP, tells us about the Annual Gift Exclusion and how it affects taxable income (it doesn't) and estate taxes (it does) in Rules for the Annual Gift Exclusion for Parents and Grandparents. Most people don't know the rules about gifting, say, an amount of money to your kids or grandkids. But it is rather simple. According to Ken,

Many people seem to think that if you give a certain amount of money to someone else, it is considered taxable income and must be reported. They also think that the annual gift tax exclusion is the amount you give that person that won’t be taxed. Both of these explanations are incorrect.

In fact, the gift exclusion is only applicable to the giving person's estate tax. That is to say that if you give more than the yearly exclusion allows (currently $12,000) to any one person in the form of a direct gift to that individual, your estate tax may be affected, but only if you have more than $2 million dollars in assets.

You could certainly give $12,000 to 100 people, and your estate taxes would be unaffected; but give more than that to one person, and your exemption (the $2 million) is reduced by the difference (i.e., if you give $15,000 to your grandchild, your estate tax exemption would be reduced by $3,000, or $15,000 minus $12,000).

However,

...Grandma can pay $50,000 in tuition directly to their grandchild’s school and it is completely outside of the gift and estate tax rules. Grandma’s $12,000 annual gift exclusion has not been used by this transaction. In fact, Grandma could still give $12,000 directly to the child.

These are all facts that I didn't know until I read Ken's article.

One caveat: 529 plans (college tuition savings/investment programs) are impacted by the gift tax exclusion:

If someone puts more than the annual gift limit into a Section 529 account, it may reduce his or her estate tax exemption. However, the IRS currently allows an exception in which someone can put five years worth of their annual gift exemption into a plan in one shot.

Also remember that a grandfather and grandmother can each give $12,000 to a grandchild and there are no ill effects on anyone's income or estate taxes; in short, grandma and grandpa could give Junior $24,000 in 2008 without any tax consequences whatsoever.

Great article.

Technorati Tags: estate planning | gift tax exclusion | CFP | Money Hacks | Kids & Money | blog carnival

In last week's Two for Tuesdays post, we talked about saving money on groceries and the Drug Store Game. Each topic surely has saved you some money already, if you tried either of them.

This week, we're talking freebies. So, let's get started.


#1

I got an email this morning from a person at Nature Made who gave me the following links for FREE 14-day supplies of various food supplements.

I've personally used Nature Made products and I can vouch for their efficacy, in general. I cannot speak to this new line, as, well, they're new, so I haven't had a chance to try them yet. But you can be sure I'll get my free sample(s).

Multivitamin: http://shortn.it/uT5t
Multivitamin for her: http://shortn.it/uTCu
Vitamin C: http://shortn.it/ykl8
Vitamin D: http://shortn.it/g7SV
Calcium: http://shortn.it/oaL7
Super B Complex: http://shortn.it/GvmG


#2

Everybody likes free, especially music. With the going rate of 99 cents per song, buying a lot of music on iTunes can really deplete your disposable income. It's also very difficult to find new, good music. Do you pay the buck for an unknown (oh, sure, you can listen to a 30-second clip) or do you not buy at all?

I have an extensive collection of LPs and CDs and finding good new music is hard to come by. There are two places, however, where you can get full songs from (sometimes) reputable artists or up-and-comers, for free. One place is iTunes.

Load up your iTunes software on Tuesday and find the free song. Apple also offers free videos.

But my new favorite, for 3 reasons that I'll explain shortly, is Amazon. Go here for this week's free songs. There are 8 songs there, free for the taking.

Here's why I really like Amazon's music downloads:

1. The files you download are mp3, a ubiquitous music file format that can play on any "iPod-like" device
2. The files, by their mp3 nature, are unencumbered by Digital Rights Management (DRM), which means that you can load them on multiple devices
3. The files are encoded at 256 kbps, rather than the somewhat "standard" 128 bitrate. This means bigger file sizes (not good, but in today's cheap media storage environment, it matters less) and better audio quality

That's it for this week. Stay tuned for next week's Two For Tuesdays, where I'll give you two more ideas on saving some of your hard-earned money.

Technorati Tags: FREE | Money Hacks | saving money | vitamins | food supplements | Two for Tuesdays

Silicon Valley Blogger, over at The Digerati Life, posted a piece entitled, "Free College Tuition To Soothe the Middle Class Pinch, that describes Stanford's decision to give "free" tuition to any student whose family makes less than $100,000 per year.

In this post, SVB points out the most salient points, one of which is the misconception that tuition is free to those students whose families earn less than $100,000. The "free tuition" is on a sliding scale, where those families making less than $55,000 get tuition at zero cost, and those that make just less than $100,000 pay $11,000 instead of the nearly $50,000 2008 tuition.

Another noteworthy point is that Ivy League schools like Princeton and Harvard are already doing this. This is a good thing; hopefully, this is becoming a trend, as we've fallen far behind our competitors in the global economy in terms of higher education and thus qualified scientists, engineers, and mathematicians.

A third point worth considering is that this program does apply only to those students who would earn entry into Stanford. That is to say, just because you make less than $100k, don't expect your child to be accepted at Stanford. He or she still has to be an elite student with tons of extracurricular activities and accomplishments under his or her belt. This is a crucial consideration.

The really great thing about this new policy directive is that it narrows the gap between those whose families can afford the cost of a private university and those who can "only afford" a public education.

In short, the so-called "middle class" gets a break on private university tuition, but only to those middle class students who are the cream of the crop.

Reliance on student loan debt should decline a bit, since many middle class families currently are expected to pay the full tuition cost to private (and public) schools. Not a lot of middle class families can afford $200,000 to $300,000 (without mortgaging their house, which helped exacerbate the Mortgage Meltdown). While many students qualify for other assistance, often the "easy" route of students loans is taken, putting onerous burdens on the student and family for years to come.

Thanks, Silicon Valley Blogger, for this enlightening post. Stay tuned for tomorrow's "Best of Kids & Money."

Technorati Tags: Kids & Money | Silicon Valley Blogger | The Digerati Life | Stanford | free college tuition | blog carnival