Tax planning: Charitable gifts and gifting to individuals

Tax planning: Charitable gifts and gifting to individuals

Consider how these may fit into your tax planning strategies.

Recipients of your charitable giving and individual gifting are not the only ones who may benefit from your gifts. With proper planning, your gifts may also bring you tax savings.

Charitable Giving:

As you prepare your 2020 tax return, be aware that if you made charitable contributions in 2020:

– You may deduct up to $300 in addition to your standard deduction, or
– You may deduct up to 100% of your Adjusted Gross Income (AGI) if you itemize your deductions.
These apply only to cash gifts made to qualifying charities (i.e., excludes a donor advised fund).

Consider these charitable giving strategies in your tax planning for 2021:

• If you expect to realize significant gains this year from investment transactions or a sale of a business or real estate, consider implementing a charitable strategy to reduce your tax bill on these gains. Your financial advisor could discuss a variety of strategies to consider. Ask your financial advisor for a copy of our “Charitable Giving Strategies” flyer and “What you need to know about qualified charitable distributions” fact sheet.

• Review your itemized deductions. If your itemized deductions are less than the standard deduction, your charitable contributions are not reducing your tax bill. Evaluate “bunching” several years’ worth of charitable contributions into the current year. This may increase your itemized deductions above the standard deduction threshold so you can receive a tax benefit for those gifts. Consider utilizing a donor advised fund for “bunching” your charitable gifts.

• If you are age 70½ or older, consider the potential benefits of a qualified charitable distribution (QCD). A QCD allows you to make a tax-free gift directly from your IRA up to $100,000 per year to qualifying charities. A QCD counts toward satisfying a required minimum distribution (RMD) without the Federal tax consequences of being included in your adjusted gross income (AGI).

Gifting to individuals:

 Incorporate tax planning when gifting to individuals.

• Evaluate the tax benefits of gifting long-term appreciated stock versus cash. Your cost basis and holding period will transfer to the recipient. If the recipient is in a lower capital gains bracket than you, some tax savings may result when the recipient sells the stock. If the recipient is under age 24 make sure you are familiar with the “kiddie tax” rules.

• If you gift stock that is in a loss position, the recipient cannot claim your loss as a deduction. However, any appreciation in the stock from the value on the date of the gift up to your original basis will not be taxable to the recipient. Instead, consider selling the stock so that you can use the loss yourself, then gift the cash.

• Be aware of the 5-year gift rule when gifting to a 529 plan. You may elect to gift five years of annual exclusion gifts in one year without using your lifetime gift exclusion. This year the annual exclusion amount is $15,000. This 5-year rule would allow a $75,000 gift to a 529 plan for each beneficiary. A married couple could transfer up to $150,000 out of their estate in one year for each beneficiary.  Keep in mind this is subject to recapture if the donor dies before the 5-year gift period has passed; no other gifts may be made to the beneficiary within the 5-year period.

• Special rules apply for certain gifts. You can pay school tuition or medical expenses for someone else without limitation. If the expenses are paid directly to the school or medical provider for the benefit of someone else, they do not count against the annual exclusion or lifetime gift exclusion.

• Gifts to individuals are not considered taxable income to the recipient and are not deductible by the giver for federal income tax purposes. Some states will allow deductions for contributions to a 529 plan.
Before taking any action, consult with a tax advisor to help determine the best possible outcome.

With the ongoing activity in tax legislation, it will be important to communicate throughout the year with your tax and legal advisors as well as your financial advisor in order to be prepared to take advantage of whatever opportunities may arise.