In a world that’s often measured by what we receive, there’s an unparalleled joy in the art of giving. The start of the holiday season is the perfect time to delve into the realm of strategic gifting. There are many practical giving strategies that can turn your heartfelt gestures into powerful tools for financial well-being. We will unwrap some of these gifting strategies, so you can uncover ways to make every gift count, both for the recipient and your financial future.
Gifting
We speak with many clients whose priority is to give to their kids. Below are a few key gifting considerations, as well as a couple of strategies specific to gifting to those under the age of majority.
For 2023 the annual gift tax exclusion amount is $17,000 per person. This means you can gift up to $17,000 to any one person free of any tax implications. If you are married filing jointly you each can contribute bringing the total to $34,000 for a married couple for 2023. By making annual gifts you can shift money out of your taxable estate to family or friends, with the goal of distributing some of your assets before death thereby reducing your taxable estate. Note: You can gift more than the annual $17,000/$34,000, but you should work with your tax professional to apply the overage to the current lifetime exemption of $12.92 (individual)/$25.84 (couple) million. For those with substantial assets, it’s important to note that many of the Tax Cut & Jobs Act (TCJA) provisions will sunset at the end of 2025 – including the lifetime exemption being cut to an estimated $6m per person.
For younger gift recipients such as children or grandchildren, consider opening a custodial account or a 529 education savings account.
• With a custodial account, such as a UTMA or UGMA, a custodian is named to hold the account until the minor reaches the age of majority, age 18 in Virginia, but varies by state.
• 529 accounts are used to cover qualified education-related expenses. You can front load 5 years’ worth of annual exemptions, or up to $85,000 for 2023. If you take this approach, you will file a gift tax return to report the gift, and you won’t be able to make contributions for the next 5 years. Depending on your state of residence, contributions may qualify for a state tax deduction. Again, speak to your tax advisor before gifting to a 529.
Charitable Giving
Like us, I am sure many of you have organizations whose mission you are passionate about. As a business, Alexis Advisors commits 1% of its gross revenues to mission-aligned non-profits such as Conserve the Future (climate-focused), YWCA (women-focused), and the Innerwork Center (mindful-living focused).
There is a wide range of ways you can express your values through giving. Below are a few strategies to think through.
Charitable Contributions for Itemizers
One great method to maximize your impact while reducing your tax burden is to include charitable contributions in your itemized deductions.
A key factor for determining the tax benefits of a charitable gift is your “annual standard deduction” amount. The standard deduction more than doubled with the passage of the TCJA in December of 2017. For 2023 taxes, single filers may claim a $13,850 standard deduction, while married couples filing jointly can claim a $27,700 standard deduction. The higher standard deduction means that if your income falls below this threshold, you won’t get a tax deduction.
However, for those taxpayers that itemize, you can deduct cash contributions made to non-profits (including donor-advised funds) of up to 60% of your adjusted gross income (AGI). The deduction limit for non-cash assets – specifically appreciated securities, if held for more than one year – is 30% of your AGI. And, any contribution amounts in excess of these limits may be carried over for up to five subsequent tax years.
Charitable Contributions for Non-Itemizers
Starting with the 2022 tax return, taxpayers can no longer claim cash donations if the standard deduction is taken. This is unfortunately still the case for 2023. But, if you are so inclined, don’t let this deter you from making a gift. Even a small gift can have an impact!
Charitable Contributions via Your IRA
Those who have turned 70.5 in 2023 can make a Qualified Charitable Distribution (QCD) to a qualified charity up to $100,000 per person ($200,000 if married) directly from your IRA. Why do this if your Required Minimum Distributions (RMDs) haven’t started? It’s a great way to give and not deplete your cash reserves – and it reduces your IRA balance, which, in turn, may reduce the amount of taxes you will need to pay when RMDs begin at age 73. You essentially transfer the funds directly to the charity, so it isn’t considered a distribution and therefore doesn’t impact your income.
For those who have started their RMDs, you can apply the QCD towards the RMD amount. Like the QCD above, transferring funds directly to a charity means that this will not increase your taxable income.
QCDs can be beneficial in preventing taxpayers from being pushed into a higher income tax bracket or preventing phaseouts of other tax deductions.
A couple of additional points – confirm that the charity is a qualified non-profit for the purpose of tax benefit. Since these distributions can take time, start this process at least four weeks before the year’s end to make sure the distribution is coded for the current tax year. And as always, State rules can vary so first speak with your tax advisor.
Donor Advised Funds
A Donor Advised Fund (DAF) can be useful in many instances. Irrevocable contributions to a DAF are eligible for a federal income tax deduction, and if the funds are invested, they can potentially grow tax-free.
DAFs allow you to make a substantial donation and receive the tax deduction in the year the DAF is funded, however, you don’t need to distribute the gift in that year – instead, you can spread out your charitable donations over a period of years. This is an excellent strategy for so many situations, including:
• If you have sold a second home, the proceeds from the sale of the home may push you into a higher tax bracket. Funding a DAF in the year you sell the home can offset some of the tax impact.
• If you want to do a Roth Conversion so your kids will inherit more tax-free assets, a DAF can be used to offset some of the tax impacts of the conversion.
• If you have inherited stock from a parent or family member and have been hesitant to sell the stock because of the low-cost basis, you can fund a DAF with these securities. As a result, you avoid the tax impact that comes with selling these securities.
• If you have a high-income-earning year, or receive a large bonus, you can use the DAF to offset some of the tax impact.
Split Interest Gifts
A split-interest gift splits the donor’s gift in two: one portion is assigned to a charitable organization, while another portion is set aside to benefit the donor or their heirs. There are many types of split-interest gifts, one of which is a Charitable Remainder Trust. This creates a lifetime income stream for the donor, and at death, the residual will be retained by the charity. In a Charitable Lead Trust arrangement, the reverse is true – during the donor’s lifetime, the charity receives a stream of payments (annuity). And, at the donor’s death, the remainder goes to the designated beneficiary. Establishing a split-interest trust should be discussed with your estate planner and tax advisor.
Conclusion
There are a lot of excellent strategies for you to take advantage of. We partner with many attorneys and CPAs to help our clients leverage the strategy appropriate to their specific situation. Give us a call if we can help!