Six Gifting and Tax Strategies to Leverage Amid the Coronavirus Outbreak

The world seems to be grappling with an unprecedented crisis right now. The Coronavirus pandemic is far from what the human race has ever witnessed. While the physical and mental health effects of COVID19 have been a concern for many, the financial repercussions of the outbreak can also not be ignored. With economic growth on a standstill, the market has seen a considerable downturn in the last few weeks. However, even in overwhelming times like these, one cannot shy away from their responsibilities and duties towards their family and the wider community. Here are some gifting and tax strategies to leverage amid the Coronavirus outbreak.

1. Direct payments and cash gifts

Many people have lost their jobs as a result of the lockdown. Some employees are also experiencing pay cuts. This is a tough time for families as investors have been forced to sell off their securities at low prices in the market. Individuals with a surplus of funds can take this opportunity to help those suffering around them. Cash gifts to children or grandchildren are an excellent way to start. As of 2020, an individual can give up to $15,000 in a year as a gift without incurring any tax consequences. The annual limit for married people is even higher, at $30,000 per annum. Trends show that most people wait until the end of the year to gift their loved ones, as they like to be prepared for the worst and keep liquid funds ready in case of an emergency. However, given the current state of affairs, this can be a good time to make an exception and go ahead with the cash gifts in the first half of the year. Moreover, with the market at an all time low, the recipients can utilize the cash gifts for investing for the future.

2. Converting to a Roth individual retirement account (IRA)

When a traditional IRA is converted to a Roth IRA, the account owner pays the income tax on the amount that is converted. With the markets experiencing a low, converting into a Roth IRA right now can be a great strategy to reduce tax liability. Furthermore, the funds in the account will grow tax-free till until the account matures. This means that the beneficiaries will not be liable to pay any additional income tax on the withdrawals.

3. Offering loans within the family

When an individual lends money to other family members, the transaction is known as an intra family loan. These loans are granted on unique interest rates, also known as applicable federal rates or AFR and are pre-determined by the Internal Revenue Services (IRS). Intra family loans enjoy a much lower rate of interest as compared to commercial loans. If there are people in a family who are struggling to pay off a high interest mortgage, home loans, education loans, or vehicle loans, they can consider taking an intra family loan at a lower rate of interest to refinance the original loan.

4. Grantor Trusts

Grantor trusts are effective investment instruments used to pass on funds to beneficiaries without any tax liabilities. Trusts like grantor retained annuity trusts (GRATs) and charity lead trusts (CLTs) are irrevocable trusts that are set by an estate owner. The owner of the trust receives annuity for a few years, and the remaining portion of the trust is passed on to the beneficiaries without any tax deductions. The tax is only paid by the owner at the time of establishing the trust and then never again. The rate of interest for such trusts is fixed by the IRS.

5. Charitable donations

As of 2020, an investor can deduct 100% of their adjusted gross income for donations made towards a public charity. With many industries of the country struggling to make ends meet due to the current pandemic, charitable contributions can be a great way to help people. But for individuals donating with the aim of saving tax, it is important to note that only qualified donations under Section 501(c)(3) of the Internal Revenue Code are tax exempt. Charities involved in religious and educational activities, prevention of cruelty to animals, along with organizations like the Red Cross, museums, etc. are considered valid for tax deductions.

6. Lifetime Gift Tax Exemption

The gift tax exemption for the year 2020 is $11.58 million for an individual. This implies that a person can give away gifts of a value of $11.58 million in their entire life without incurring any gift taxes. In the case of a married couple, the amount is further doubled at $23.16. Apart from a small cash gift, people can also consider lifetime gift tax exemption and give away their assets to their future generations. Moreover, the limit is expected to drop by half by the year 2026, so this may be the right year to use the exemption.

To sum it up

The COVID 19 pandemic is causing financial anxiety in many households. The ambiguous future and a lack of enough information and innovation to treat it is also a contributing factor to the falling economies. While the lockdown gets extended around the world, it is important now than ever to help the people in need. The points mentioned above can not only provide for families but can also bring tax relief to the individual helping them.

If you find any of these methods useful and need help in understanding how to proceed, you can get in touch with financial advisors and leverage their professional knowledge on how to manage your funds and help others at the same time.