By Dan Federman, CFP®
If you’re thinking about making gifts to family, friends, or charities, here are some points to keep in mind as you make your gifting plans.
Understand What Triggers Gift Tax When Giving to Individuals
If you are making a gift to an individual, you are the one responsible for paying federal gift taxes (unless you make a special agreement in which the recipient pays). The good news is most people do not usually owe gift taxes because there are both annual and lifetime federal gift tax exemption amounts.
In any given year, you may gift up to the annual exclusion amount ($15,000 for individuals and $30,000 for couples in 2019) to as many individuals as you like, without needing to pay gift taxes or disclosing your gifts to the IRS.
But you will have to notify the IRS if you exceed the annual exclusion amount. For example, if you make a large gift of $150,000 to help an adult child with a down payment on their home purchase, you will need to complete Form 709 to let the IRS know you have exceeded the annual exclusion amount.
However, even though you are required to report this gift to the IRS, you will generally owe no taxes on it. In our example, the $135,000 over the annual exclusion amount would count toward (and be subtracted from) your lifetime gift and estate exclusion amount ($11.4 million for individuals and $22.8 million for couples in 2019).
Qualified tuition expenses and qualified medical expenses are also excluded from gift taxes. For example, if you are a grandparent paying an education provider directly, the tuition payment for your grandchild will not count toward your annual exclusion amount and will not be subject to gift taxes.
In other words, you can gift up to $15,000 to your grandchild and cover their $25,000 tuition without owing any gift taxes or affecting your lifetime exclusion amount.
Similarly, you can pay for someone else’s qualified medical expenses if you pay the health provider directly.
What If I Want to Make a Charitable Gift?
If you are looking to make donations to charity, your main choices boil down to donating cash or non-cash assets.
Points to Keep in Mind When Donating Cash
For Those Who Itemize
If you itemize deductions when filing your tax returns, under the Tax Cuts and Jobs Act of 2017, you may deduct 60%, up from 50%, of your adjusted gross income for a charitable gift of cash in any given year.
For Those Who Take the Standard Deduction
If you are using the standard deduction ($12,200 for individuals; $24,400 for couples; + $1,300 for those who are over 65 or blind in 2019), donating to a charity may make you feel good, but it does not help lower your taxes.
If you are among the “standard deduction” population and are seeking a tax benefit for charitable cash contributions, you may overcome this barrier by “bunching” several years’ worth of charitable contributions to a donor-advised fund (DAF). In the year you bunch charitable contributions, you can itemize your deductions and receive the charitable income tax deduction for the full amount contributed.
While the administrator of a DAF legally holds and controls the funds once contributed, you as the donor will be able to recommend how much and when to give to charities. Donors typically have the flexibility to spread their grants over any time. If you are not ready to make a grant, you can invest and grow the funds tax-free inside the donor-advised fund.
Qualified Charitable Distributions from IRAs
If you are over age 70 ½ and have begun taking required minimum distributions (RMDs), the most effective tax strategy for gifting may be the qualified charitable contribution.
You can transfer up to $100,000 ($200,000 for a married couple) from your IRA to a qualified public charity. These IRA distributions are not subject to income taxes. You must fill out the proper form with your custodian to make these gifts. It is also possible to have a checkbook on your IRA to make these gifts.
One consideration to note is that if you are taking advantage of qualified charitable distributions from your IRAs, you are not allowed to send those contributions to a new or existing donor-advised fund.
While donating cash may be a convenient way to give to charity, if your gift is not a qualified charitable distribution from an IRA, you may find it more beneficial to donate appreciated non-cash assets such as low-basis stock.
Donating appreciated non-cash assets allows you to avoid paying capital gains taxes and allows you to get a deduction for the fair market value of the stock. Also, the charity can sell the stock without paying capital gains tax. As a result, you receive a greater tax deduction, and you contribute more to the charity.
Below are examples of non-cash assets that can be contributed to charities:
- Publicly traded securities
- Private company stock (S-Corp, C-Corp) and restricted stock
- LLC and limited partnership interests
- Real estate
- Oil and gas royalty interests
- Bitcoin and other cryptocurrencies
- Life insurance
- Hedge fund interests
Are There Other Ways to Give to Children or Grandchildren?
Some other ways to give to children or grandchildren include funding their Roth IRAs or 529 college savings plans.
If you have a child or grandchild with earned income, you can fund their Roth IRA contribution up to $6,000 per year, if they earned up to this amount.
You can also contribute to a college savings plan. One strategy, known as “superfunding,” allows families to make a large lump-sum contribution without having to pay gift taxes while also protecting their lifetime gift and estate tax exemption.
Superfunding involves contributing up to five years’ worth of annual gift tax exclusion amounts ($75,000 for individuals, $150,000 for couples) to a grandchild’s 529 plan and then checking a box to make sure the contribution is spread ratably over five years.
Before you write that next check to your loved ones or charity, make sure to discuss your gifting plans with your financial advisor and CPA.
Schedule a complimentary meeting with a wealth advisor to discuss your personal situation.
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