Oblivious Investor http://www.obliviousinvestor.com Low-Maintenance Investing with Index Funds and ETFs Fri, 30 Jan 2015 13:00:54 +0000 en-US hourly 1 http://wordpress.org/?v=3.9.3 Investing Blog Roundup: Missing Out on Subsidized Insurance http://www.obliviousinvestor.com/investing-blog-roundup-missing-out-on-subsidized-insurance/ http://www.obliviousinvestor.com/investing-blog-roundup-missing-out-on-subsidized-insurance/#comments Fri, 30 Jan 2015 13:00:54 +0000 http://www.obliviousinvestor.com/?p=7379 This week, the Kaiser Family Foundation released the results of a survey showing that, of the approximately 30 million adults in the U.S. who remain without health insurance, 48% would qualify for assistance purchasing such insurance (either tax credits or Medicaid). If you (or somebody you care about) doesn’t have health insurance, it’s worth taking the time to learn how such subsidies work, so that you don’t miss out.

You can read more about the survey and its other findings here:

Investing Articles

Other Money-Related Articles

Thanks for reading!

Interested in economics? Pick up a copy of my latest book:

Microeconomics Made Simple: Basic Microeconomic Principles Explained in 100 Pages or Less

Disclaimer: Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. Neither Mike Piper nor Simple Subjects, LLC makes any warranty as to the accuracy of any information contained in this communication. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. On financial matters for which assistance is needed, I strongly urge you to meet with a professional advisor who (unlike me) has a professional relationship with you and who (again, unlike me) knows the relevant details of your situation.

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Moving Beyond Sound-Bite Investing Wisdom http://www.obliviousinvestor.com/moving-beyond-sound-bite-investing-wisdom/ http://www.obliviousinvestor.com/moving-beyond-sound-bite-investing-wisdom/#comments Mon, 26 Jan 2015 13:00:20 +0000 http://www.obliviousinvestor.com/?p=7374 The following questions — and others of a similar nature — are some of the most common in my email inbox:

  • Does buying an S&P 500 fund count as stock picking, given that there’s a committee of people choosing which stocks are included in the index?
  • Does overweighting U.S. stocks (or value stocks, or REITs, or whatever) count as active investing?
  • Does rebalancing count as market timing?
  • Does basing my spending rate in retirement on market valuations (and/or interest rates) count as market timing?
  • Does Social Security count as a bond?

Typically, the person is asking the question because they’ve latched on to a sound bite-style piece of investing wisdom (e.g., stock picking is bad, market timing is bad, passive investing is better than active investing, your bond allocation should be equal to your age, etc.) and they’re trying to figure out how to apply it.

Sound bites are helpful when you’re first getting started investing, because they allow you to put a decent plan into place without being completely overwhelmed with information. But as you might imagine, they tend to be oversimplifications. And, eventually, rather than trying to base every decision on such simplified advice, you’re better off taking the time to understand the reasoning behind the sound bite, so you can make critical decisions on your own.

For example, why do we often say that stock picking is bad? The answer:

  • It results in less-diversified portfolios,
  • It often results in higher costs (i.e., brokerage commissions and sometimes taxes) as the investor rapidly buys and sells various stocks, and
  • There’s quite a bit of research showing that it’s unlikely that you’ll consistently pick above-average stocks anyway.

Once you understand that, you don’t have to ask whether something counts as stock picking. You can simply determine for yourself whether the activity in question has the same drawbacks — because, ultimately, that’s what you really care about.

So for example, if you’re considering using an S&P 500 index fund in your 401(k), rather than wondering whether or not that would count as stock picking, you can instead try to directly address the important questions:

  • Would using that fund allow you to be sufficiently diversified? (And, is there a way to be better diversified?)
  • Would using that fund result in high costs? (And, is there a way to achieve lower costs?)
  • Is there any reason to think that the stocks included in the index (and therefore the fund) are in some way systematically chosen to be poor performers?

In summary, when it comes to investing, when you find yourself asking, “Does _____ count as _____?” there’s a good chance you’re asking the wrong question.

Interested in economics? Pick up a copy of my latest book:

Microeconomics Made Simple: Basic Microeconomic Principles Explained in 100 Pages or Less

Disclaimer: Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. Neither Mike Piper nor Simple Subjects, LLC makes any warranty as to the accuracy of any information contained in this communication. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. On financial matters for which assistance is needed, I strongly urge you to meet with a professional advisor who (unlike me) has a professional relationship with you and who (again, unlike me) knows the relevant details of your situation.

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Investing Blog Roundup: Taking Winnings Off the Table http://www.obliviousinvestor.com/investing-blog-roundup-taking-winnings-off-the-table/ http://www.obliviousinvestor.com/investing-blog-roundup-taking-winnings-off-the-table/#comments Fri, 23 Jan 2015 13:00:14 +0000 http://www.obliviousinvestor.com/?p=7371 There’s no reliable way to know when the next market downturn is coming. For those of us who are still many years from retirement, that shouldn’t be a scary thought, given that a market downturn simply allows us to buy shares at lower prices. But, as Bill Bernstein reminds us this week, a market downturn can be a big problem if you’ve just retired, if your portfolio isn’t prepared for such an event.

Investing Articles

Thanks for reading!

Interested in economics? Pick up a copy of my latest book:

Microeconomics Made Simple: Basic Microeconomic Principles Explained in 100 Pages or Less

Disclaimer: Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. Neither Mike Piper nor Simple Subjects, LLC makes any warranty as to the accuracy of any information contained in this communication. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. On financial matters for which assistance is needed, I strongly urge you to meet with a professional advisor who (unlike me) has a professional relationship with you and who (again, unlike me) knows the relevant details of your situation.

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3 Common Social Security Misunderstandings http://www.obliviousinvestor.com/3-common-social-security-misunderstandings/ http://www.obliviousinvestor.com/3-common-social-security-misunderstandings/#comments Mon, 19 Jan 2015 13:00:21 +0000 http://www.obliviousinvestor.com/?p=6969 The following three statements about Social Security are common, but incorrect. (Or rather, each is partially correct, but the part that’s incorrect is super important.) Can you spot the errors?

  1. If you are married, it’s a good idea to delay taking Social Security.
  2. If you have a shorter than average life expectancy, you should claim early. (Or conversely, if you have a longer than average life expectancy, you should wait to claim.)
  3. Social Security is actuarially neutral (meaning that claiming at one age is as good as another, given that you’re likely to get the same overall amount).

In each case, the error is the same: It addresses the when-to-claim question by looking at the wrong life expectancy in some cases.

Myth: “If you’re married, it’s a good idea to delay taking Social Security.”

When the spouse with the higher “primary insurance amount” delays taking retirement benefits, it increases the amount the couple will receive per month as long as either spouse is still alive (because if the high-PIA spouse dies first, the low-PIA spouse can claim a widow/widower benefit, which will be increased as a result of the high-PIA spouse having waited).

As a result, it’s true that it’s typically advantageous for the high-PIA spouse to delay taking benefits.

However, for this very same reason (that is, the availability of widow/widower benefits) it is typically less advantageous for the low-PIA spouse in a married couple to delay than for an unmarried person to delay. When the low-PIA spouse delays, it only increases the amount the couple will receive per month as long as both spouses are still alive.

Myth: “If you have a short life expectancy, you should claim early.”

While the above statement is typically true for unmarried people, it’s often wrong for married people.

For married people, each person must consider both life expectancies.

If one spouse has a very short life expectancy, that is a reason for the low-PIA spouse to claim early (because the couple’s first-to-die life expectancy isn’t for very long). But it is not necessarily a reason for the spouse with the short life expectancy to claim early.

And conversely, if one spouse has a very long life expectancy, that is a reason for the high-PIA spouse to wait to claim (because the couple’s second-to-die life expectancy is quite long). But it is not necessarily a reason for the spouse with the long life expectancy to wait.

Myth: “On average, it doesn’t matter when you claim, because Social Security is actuarially neutral.”

Social Security is designed to be approximately actuarially neutral for unmarried people.* That is, if they claim early, the lower monthly benefit they receive should be, on average, approximately offset by the fact that they’ll receive benefits for a greater number of months.

However, if delaying retirement benefits is actuarially neutral for an unmarried person (i.e., on average, it will neither help nor hurt them), then, for the reasons discussed above, delaying must be better than neutral for the high-PIA spouse in most married couples and worse than neutral for the low-PIA spouse in most married couples.

How to Make Better Social Security Decisions

In summary, to make proper Social Security decisions:

  • If you are unmarried, the decision should of course be based on only your own life expectancy,
  • For the high-PIA spouse in a married couple, the decision should be based on the couple’s second-to-die life expectancy, and
  • For the low-PIA spouse in a married couple, the decision should be based on the couple’s first-to-die life expectancy.

*But even for a specific unmarried person, Social Security still tends not to be actuarially neutral. That is, most single people have a reason to expect that claiming early or late will be advantageous. For example, you may have a longer (or shorter) than average life expectancy, or inflation-adjusted interest rates may be higher or lower than those baked into the Social Security benefit calculations.

Interested in economics? Pick up a copy of my latest book:

Microeconomics Made Simple: Basic Microeconomic Principles Explained in 100 Pages or Less

Disclaimer: Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. Neither Mike Piper nor Simple Subjects, LLC makes any warranty as to the accuracy of any information contained in this communication. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. On financial matters for which assistance is needed, I strongly urge you to meet with a professional advisor who (unlike me) has a professional relationship with you and who (again, unlike me) knows the relevant details of your situation.

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Investing Blog Roundup: Automatic IRA Contributions for Many in Illinois http://www.obliviousinvestor.com/investing-blog-roundup-automatic-ira-contributions-for-many-in-illinois/ http://www.obliviousinvestor.com/investing-blog-roundup-automatic-ira-contributions-for-many-in-illinois/#comments Fri, 16 Jan 2015 13:00:45 +0000 http://www.obliviousinvestor.com/?p=7368 The state of Illinois recently passed a law that is intended to increase the rate at which people are saving for retirement. When the law eventually goes into effect, businesses that have 25 or more employees and that do not offer an employer-sponsored retirement plan will be required to set up a program in which employees will have 3% of their pay automatically contributed to a Roth IRA. (Employees will have the ability to opt out or change the contribution percentage.) It will be interesting to see what happens.

Jim Blankenship and Dan Kadlec discuss the new law:

Investing Articles

Other Money-Related Articles

Thanks for reading!

Interested in economics? Pick up a copy of my latest book:

Microeconomics Made Simple: Basic Microeconomic Principles Explained in 100 Pages or Less

Disclaimer: Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. Neither Mike Piper nor Simple Subjects, LLC makes any warranty as to the accuracy of any information contained in this communication. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. On financial matters for which assistance is needed, I strongly urge you to meet with a professional advisor who (unlike me) has a professional relationship with you and who (again, unlike me) knows the relevant details of your situation.

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Why Is Currency Risk Bad? http://www.obliviousinvestor.com/why-is-currency-risk-bad/ http://www.obliviousinvestor.com/why-is-currency-risk-bad/#comments Mon, 12 Jan 2015 13:00:17 +0000 http://www.obliviousinvestor.com/?p=7367 A reader writes in, asking:

“I don’t see why currency risk is necessarily bad. Sure, sometimes the dollar will increase in value, making your foreign investments worth less. But sometimes the opposite will happen. It seems like, on net, this should neither help nor hurt over an extended period.”

As a bit of background information: “Currency risk” refers to the volatility that foreign investments (such as international stock funds) experience as a result of fluctuating exchange rates. For example, your international holdings will decline in value if the dollar increases in value relative to the currencies in which your foreign holdings are denominated. Currency risk is often cited as a reason for underweighting international stocks and bonds relative to the part of the overall world market that they make up.

This reader is correct that currency risk should, on average, neither increase nor decrease your returns. And that’s precisely why it’s an undesirable risk. After all, there are an assortment of risks that do increase the expected return of your portfolio: increasing your equity allocation, increasing the duration of your bond holdings, reducing the average credit rating of your bond holdings, etc.

So, if there’s a certain level of overall risk that you can tolerate, you might as well get as much expected return for that level of risk as you can. In other words, why take on any risks for which you would not expect to be compensated? (This is also, by the way, the reason that holding a concentrated portfolio of individual stocks does not typically make sense. It increases the risk relative to a diversified stock portfolio, yet it does not increase expected return.)

To be clear, the point here isn’t that including an international allocation is a bad idea. It isn’t. Most experts agree that including international stocks in your portfolio is still desirable, because it increases the total number of stocks that you hold, which improves diversification, and because it adds a component that has less-than-perfect correlation to U.S. stocks while still having similar expected returns. The point is simply that it likely makes sense to hold a smaller allocation to international stocks (and bonds) than you would if currency risk did not exist.

Interested in economics? Pick up a copy of my latest book:

Microeconomics Made Simple: Basic Microeconomic Principles Explained in 100 Pages or Less

Disclaimer: Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. Neither Mike Piper nor Simple Subjects, LLC makes any warranty as to the accuracy of any information contained in this communication. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. On financial matters for which assistance is needed, I strongly urge you to meet with a professional advisor who (unlike me) has a professional relationship with you and who (again, unlike me) knows the relevant details of your situation.

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Investing Blog Roundup: Advice/Tips for Writers? http://www.obliviousinvestor.com/investing-blog-roundup-advicetips-for-writers/ http://www.obliviousinvestor.com/investing-blog-roundup-advicetips-for-writers/#comments Fri, 09 Jan 2015 13:00:35 +0000 http://www.obliviousinvestor.com/?p=7366 I was recently asked by a new personal finance blogger if I had any writing tips to share. All I really had to offer was my general writing philosophy: Never make two points when you can make one instead. (This applies to sentences, paragraphs, and, perhaps most importantly, articles.)

So, for those of you with experience writing, I’d be interested to hear what tips, advice, or resources you have to share. I’ve enabled comments on this post, so please feel free to click over to the blog and share your thoughts!

Investing Articles

Other Money-Related Articles

Thanks for reading!

Interested in economics? Pick up a copy of my latest book:

Microeconomics Made Simple: Basic Microeconomic Principles Explained in 100 Pages or Less

Disclaimer: Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. Neither Mike Piper nor Simple Subjects, LLC makes any warranty as to the accuracy of any information contained in this communication. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. On financial matters for which assistance is needed, I strongly urge you to meet with a professional advisor who (unlike me) has a professional relationship with you and who (again, unlike me) knows the relevant details of your situation.

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Do I Need a CFP, a CPA, or Both? http://www.obliviousinvestor.com/do-i-need-a-cfp-a-cpa-or-both/ http://www.obliviousinvestor.com/do-i-need-a-cfp-a-cpa-or-both/#comments Mon, 05 Jan 2015 13:00:52 +0000 http://www.obliviousinvestor.com/?p=7364 A reader writes in, asking:

“I’m looking for a ‘fee only’ professional who can take care of everything including tax returns, tax planning, financial planning, and handling the portfolio. I’m getting to the point where I no longer want the hassle, and my wife won’t want to handle it at all once I’m gone. Does such a person exist? Would I be better off looking among CPAs or CFPs?”

Let’s tackle the question of certifications first, since it’s relevant for anybody seeking an advisor, then we’ll move on to whether it makes sense to use a single person for all of the services desired.

Which Certification is More Relevant?

The sections of the CPA exam are:

  • Financial Accounting and Reporting (dealing with, for example, the statements that publicly traded companies must provide to shareholders),
  • Auditing and Attestation,
  • Regulation (dealing with individual taxation, business taxation, and business law), and
  • Business Environment (a catch-all category for other business topics such as economics, operations, finance, and information systems).

And the topics covered by the CFP exam are:

  • General Principles of Financial Planning,
  • Insurance Planning,
  • Investment Planning,
  • Income Tax Planning,
  • Retirement Planning,
  • Estate Planning,
  • Interpersonal Communication, and
  • Professional Conduct and Fiduciary Responsibility.

As you can see, the CFP exam is definitely tailored more precisely to personal finance than the CPA exam is.

However, there are two important caveats to note here.

First, there’s an additional, lesser-known credential that some CPAs go on to earn: Personal Financial Specialist (PFS). The PFS curriculum is very similar to the CFP curriculum, as are the topics covered on the exam.

Second, it would be rare to find any professional who is truly an expert in each of the topics covered by the exam for their certification. As you might expect, a professional’s expertise is going to depend much more on what field they work in than on what certification(s) they have. To use myself as an example, despite being a CPA, I know next to nothing about auditing, because I have never worked in that field and because my exam on the topic was approximately 4 years ago, meaning I’m well on my way to forgetting what little I once did know.

In summary, if you’re looking for a very comprehensive financial planner/professional, a CFP or somebody with the CPA and PFS certifications is likely to be your best bet. However, a person’s expertise will depend at least as much on their experience as on their certifications.

Is One Professional Really a Good Idea?

It’s easy to find a tax preparer who also does financial planning. Alternatively, it’s easy to find a portfolio manager who also does financial planning. But somebody who does tax preparation, financial planning, and portfolio management would be pretty rare. (And frankly, that makes sense. Trying to become an expert in all three professions would be exceedingly difficult.)

The most common solution would be to use two separate professionals: a tax preparer and a financial planner/portfolio manager. (In some cases, you may find it convenient to find a firm that has both types of professionals.)

Alternatively, you may not even need to pay a professional, per se, for portfolio management. Developments in the last few years — specifically, the rise of all-in-one funds and so-called “robo-advisors” — have made it clear that portfolio management is a commodity service, the cost of which is rapidly declining (and even approaching zero).

Interested in economics? Pick up a copy of my latest book:

Microeconomics Made Simple: Basic Microeconomic Principles Explained in 100 Pages or Less

Disclaimer: Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. Neither Mike Piper nor Simple Subjects, LLC makes any warranty as to the accuracy of any information contained in this communication. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. On financial matters for which assistance is needed, I strongly urge you to meet with a professional advisor who (unlike me) has a professional relationship with you and who (again, unlike me) knows the relevant details of your situation.

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Investing Blog Roundup: Jonathan Clements Money Guide 2015 http://www.obliviousinvestor.com/investing-blog-roundup-jonathan-clements-money-guide-2015/ http://www.obliviousinvestor.com/investing-blog-roundup-jonathan-clements-money-guide-2015/#comments Fri, 02 Jan 2015 13:00:42 +0000 http://www.obliviousinvestor.com/?p=7363 This week, Jonathan Clements released his new book: Jonathan Clements Money Guide 2015. I received a review copy last week, and I must say that I’m impressed. It is, I believe, the broadest personal finance book I’ve ever encountered — discussing everything from saving for retirement, to buying a home, to 529 plans, to Social Security claiming strategies.

The other particularly unique aspect of the book is its super-timely nature. The most recent version has data that Clements uploaded as of 12/31, so it’s not even a week old.

Because the book is intended to be a reference guide (hence the broad range of topics covered and the emphasis on timely information), it isn’t necessarily meant to be read cover-to-cover. Instead, each section is a stand-alone explanation of the topic in question.

Personally, another use I can see for the book (specifically, the paperback version) is as a loaner. When a friend or family member asks you for information about a given topic, just lend them your copy of the book, with post-it notes on the relevant pages. (This is in contrast to handing them an entire book on the topic, which would be more likely to go unread.)

As far as the writing style, if you’re familiar with Clements’s work at The Wall Street Journal, you know exactly what to expect: no-frills, plain-English explanations.

Investing Articles

Thanks for reading!

Interested in economics? Pick up a copy of my latest book:

Microeconomics Made Simple: Basic Microeconomic Principles Explained in 100 Pages or Less

Disclaimer: Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. Neither Mike Piper nor Simple Subjects, LLC makes any warranty as to the accuracy of any information contained in this communication. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. On financial matters for which assistance is needed, I strongly urge you to meet with a professional advisor who (unlike me) has a professional relationship with you and who (again, unlike me) knows the relevant details of your situation.

You may unsubscribe at any time by clicking the link at the bottom of this email (or by removing this RSS feed from your feed reader if you have subscribed via a feed reader).

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How Much Can I Give Per Year Without Having to Pay Tax http://www.obliviousinvestor.com/taxes-on-a-gift-do-i-have-to-pay-any/ http://www.obliviousinvestor.com/taxes-on-a-gift-do-i-have-to-pay-any/#comments Mon, 22 Dec 2014 13:00:24 +0000 http://www.obliviousinvestor.com/?p=6218 Administrative note: There will be no articles this upcoming Friday or Monday, due to the holidays. The regular posting schedule will resume the following Friday (1/2). I hope you all enjoy your holidays!

A reader writes in, asking:

“How much can I give per year without having to pay any tax? I read in one place that it’s $14,000 and in another place that it’s over $5 million.”

First, a quick point of clarification for any readers new to the topic: The recipient of a gift does not have to pay tax on it. It is only the person giving the gift who has to worry about the gift tax.

Excluded Gifts

None of the following types of transfers are subject to the gift tax:

  • Gifts to your spouse,
  • Gifts to a qualifying charity,
  • Gifts to a political organization for its use, and
  • Payments made directly to an educational institution or health care provider to pay for somebody else’s tuition or medical expenses.

In other words, you can give away as much money as you want in any of the above ways, without having to worry about gift tax.

Annual Gift Tax Exclusion

For gifts that don’t fall under any of the above exclusions, you can still give (for 2014 and 2015) up to $14,000 per year without the gift being taxable.

A key point here is that this annual exclusion is per donor, per recipient. In other words, you can give up to $14,000 per year to as many different people as you’d like, without ever exceeding the annual exclusion. And if you’re married, your spouse could also give up to $14,000 to each of those same people without ever exceeding the annual exclusion.*

Lifetime Exclusion

So what happens once you exceed the annual exclusion amount? You’ll have to file Form 709 to report the taxable gift, but in most cases you still won’t have to pay any gift tax. That’s because, after exhausting your annual exclusion, you then have to exhaust your lifetime exclusion before you actually have to pay any gift tax.

For example, if you give $40,000 to your brother in 2015, you will have made a taxable gift of $26,000 (that is, $40,000 minus the $14,000 annual exclusion). This $26,000 amount will come out of your lifetime exclusion.

As of 2014, the lifetime exclusion is $5.34 million (and twice that for married couples). For 2015, the amount is $5.43 million (and twice that for married couples). As you might imagine, most people never have to pay any gift tax, because they never even come close to exceeding their lifetime exclusion.

Of note: The lifetime exclusion is a shared exclusion with the estate tax. (The overall purpose of the gift tax, by the way, is to eliminate the possibility of people simply gifting their assets to their heirs before they die, in order to avoid the estate tax. So a shared exclusion makes sense.) In other words, by making a taxable gift, you reduce the amount that can be left to your heirs before the estate tax kicks in.

*Spouses are also allowed to elect (on Form 706) to have gifts treated as if they were given 50/50 by each spouse. This would be helpful, if, for instance, you have a $20,000 piece of property that you want to give to somebody. If only one spouse gives it (and no special election is made), then there’s a $6,000 taxable gift (assuming a $14,000 annual exclusion). But if a gift-splitting election is made, there would be no taxable gift because a total $28,000 annual exclusion would be available.

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