As the year draws to a close, many people feel inspired to give back, whether to the causes they care about or to the people who mean the most to them.
Whether you’re considering charitable donations or financial gifts for family members, understanding the financial implications of these gifts can make your generosity go further.
Here’s a financial planning guide to charitable and family gifting to make this season even more impactful.
Giving to Charity
Charitable giving allows you to support the causes you’re passionate about, often with the added benefit of tax savings. Understanding specific strategies for charitable contributions can maximize your impact, ensuring more of your gift reaches the charity and less goes to taxes.
Tax Benefits: Understanding the Basics
Tax benefits for charitable donations are only available when donations are made to qualified organizations, such as 501(c)(3) nonprofits. Additionally, these benefits apply only if you itemize deductions rather than taking the standard deduction. Some people maximize tax savings through a “bunching” strategy, where they combine donations in one tax year to surpass the standard deduction threshold.
Qualified Charitable Distributions (QCDs)
Qualified Charitable Distributions (QCDs) offer an effective way for individuals 70½ or older to make charitable donations directly from their IRAs, potentially reducing taxable income. Here are the main considerations:
- Eligibility: You don’t have to be taking required minimum distributions (RMDs) to use a QCD. As long as you’re 70½, you can make QCDs.
- Limit for 2024: The QCD limit is $105,000 per individual, adjusted annually for inflation.
- Reporting Requirements: The forms used to report IRA distributions don’t indicate if a QCD was made. To ensure this distribution is not taxed, communicate with your tax preparer and inform them of your QCD and the amount.
Donating Appreciated Stock
If you have stocks or other assets that have appreciated in value, donating them to charity can provide substantial tax savings:
- Comparison: If you sell appreciated stock, you’ll owe capital gains tax before donating the proceeds, reducing the overall impact of your gift. Donating the stock itself avoids capital gains tax and provides a deduction based on the stock’s full market value.
- Additional Benefit for Charities: Charities can sell the stock without any tax obligation, keeping the full value. This effectively removes taxes from the equation, maximizing funds for both you and the charity.
- Use with Donor-Advised Funds (DAFs): Appreciated stock can also be contributed to a DAF, offering an immediate tax deduction while allowing you to decide which charities to support over time.
Donor-Advised Funds (DAFs)
DAFs allow you to contribute assets, claim an immediate tax deduction, and choose when and how to distribute funds to charities. This flexibility can be especially useful in years of unusually high income:
- Tax Savings in High-Income Years: By contributing more to a DAF during high-income years, you can reduce the amount taxed in the highest bracket, often resulting in significant savings.
Giving to Family
In addition to supporting charities, many people choose to share financial gifts with family members. By planning these gifts carefully, you can help loved ones while minimizing tax implications.
Annual Gift Exclusion
The annual gift exclusion is a straightforward way to transfer wealth to family members without incurring gift tax. For 2024, you can give up to $18,000 per recipient, per year. Here’s how it works:
- Gift Limit: Each individual can gift up to $18,000 per recipient annually without affecting their lifetime estate exemption. For instance, a couple could gift a combined $36,000 to each child without using any of their lifetime exemption.
Advanced Strategy: Annual Gifting through Irrevocable Trusts
For high-net-worth families, annual gifting can be elevated by establishing irrevocable trusts for grandchildren or other heirs. This strategy allows assets to grow over time on behalf of the beneficiaries while still taking advantage of the annual gift exclusion:
- How It Works: By contributing the annual exclusion amount into an irrevocable trust each year, you can gift money that grows tax-free within the trust for the grandchild’s future needs, ensuring that the funds remain in the family’s financial plan.
- Legal Considerations: To qualify the gift for the annual exclusion, specific rules must be followed to show that it’s a “present interest” gift. This often involves Crummey Powers, which give beneficiaries a temporary right to withdraw the funds, ensuring eligibility under IRS guidelines.
- Importance of Expert Guidance: This strategy is complex and requires precision. An estate attorney can guide you through the rules, explain Crummey Powers, and ensure the trust meets legal standards for tax purposes.
Lifetime Exemption and Gift Tax Considerations
For gifts that exceed the annual exclusion, the excess amount counts toward the lifetime estate and gift tax exemption, which is $13.61 million per individual ($27.22 million per couple) in 2024. However, this amount is set to change:
- Upcoming Reduction: Under the Tax Cuts and Jobs Act (TCJA), the lifetime exemption is scheduled to revert to around $6 million per individual when (or if) the act sunsets in 2026. Staying informed of these changes can help guide your long-term estate and gifting strategies.
Direct Payments for Medical or Education Expenses
There is an exception to gift tax rules for direct payments made to healthcare providers or educational institutions:
- How It Works: Payments made directly to cover medical or educational expenses don’t count toward your annual gift exclusion or lifetime exemption.
- Important Caveat: To qualify for this exemption, payments must be made directly to the provider or institution. If you give the money to a family member to pay the expenses, it will count toward the annual exclusion.
Gifting to 529 Plans
Helping a family member with future education costs is a meaningful way to support their goals. 529 college savings plans grow tax-free when used for qualified educational expenses.
- Gift Acceleration: You can front-load 529 plan contributions by making five years’ worth of gifts at once—up to $180,000 for a couple—without using your lifetime exemption. However, only the account owner is eligible for any state tax benefits associated with contributions, so it may make sense to let the primary contributor (often a parent or grandparent) own the account.
The Importance of Planning Your Giving
Whether you’re supporting a meaningful cause, helping family members, or both, strategic planning can enhance your impact and ensure your gifts align with your financial objectives. The holiday season provides a perfect opportunity to reflect on these goals, making the most of your giving today and for future generations.
Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance. Additional information about Albion Financial Group is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 105957. Albion Financial Group only transacts business in states where it is properly registered, notice filed or excluded or exempted from registration or notice filing requirements.
