Optimizing Gifting Strategies to Minimize Taxes
How to Gift Assets to Family Members and Charities in a Tax-Efficient Manner
When it comes to managing substantial wealth, an important strategy to consider is gifting. While this can apply to anyone with interest, it’s particularly crucial for those working with an estate above and beyond current federal exemptions. Furthermore, establishing a gifting strategy while living can be an enlightening experience for the donor to see the outcome of helping a family member or what a meaningful charity is able to do with the proceeds while you’re still living. In this post, we will discuss some tax-efficient avenues of gifting that can be implemented today.
Strategies for Family Members
1. Annual Exclusion and Gift Splitting: As of 2024, the annual gift tax exclusion has been increased to $18,000 per year. One piece to consider that is commonly overlooked is that this annual exclusion is on a per-individual basis. For example, a married couple with two children can gift up to $36,000 per child per year, totaling $72,000. The key here is that each spouse can utilize their exclusion, and this can be expanded to any additional individual as you see fit without tax implications or the need to file a gift tax return.
Tax-Savvy Tip: If you have plans to make a gift, consider where the recipient’s taxable income is at and take advantage of the 0% federal capital gains rate. In 2024, the threshold is set to $47,025 for single filers and $94,050 for joint filers. The idea here is that you can consider gifting appreciated stock from your portfolio rather than cash.
2. Lifetime Exclusion: As of 2024, the lifetime gift tax exclusion is $13.61 million per individual or $27.22 million for married couples. This allows for a significant wealth transfer without incurring gift taxes. It’s important to note that using this exclusion reduces your estate tax exemption dollar for dollar. Adding an additional layer of consideration, we know that these exemptions were doubled as a product of the Tax Cuts and Jobs Act in 2017, and this is currently on track to sunset in 2026. This would effectively cut the exemption in half to roughly $7 million per individual. For those who are comfortably below these figures, this is a great strategy to gift larger amounts today. For those who would be affected by this potential change, it would be wise to consult with your wealth and tax advisor to strategize a game plan for both outcomes.
3. Gift Tax Exemptions: In select situations, the IRS does allow for tax-advantaged gifting beyond what has been noted above. Always keep the receipts and file them in a safe location along with your other tax records for the year.
a. Tuition: Direct payments made to an accredited educational institution for tuition are a great way to remain tax-savvy and lower your taxable estate. It is worth saying twice: This payment needs to be made directly to the institution, not to the recipient, and this perk does not include paying for books, supplies, dormitory fees, or similar indirect expenses. If done, this will start to utilize the noted annual exclusion.
b. Medical Expenses: Like tuition payments, qualified medical expenses are also an available exclusion if payments are made directly to the provider. This exemption only applies to medical expenses that are deductible for income tax purposes and excludes many cosmetic surgeries, general health maintenance, and non-prescription medications.
c. Front-Loading of 529 Accounts: Finally, another tactic to gift in addition to the annual exclusion is making contributions in advance to a 529 savings plan. The IRS allows for five years’ worth of contributions in a lump sum to a recipient’s 529 account. In 2024, this means that you could make a contribution of $90,000 ($180,000 for a married couple). This is particularly advantageous for those looking to quickly lower their taxable estate and jump-start tax-deferred growth. One consideration worth noting is the pro rata rule. If the contributor passes away in year four, 20% of the election ($18,000) must be pulled back when calculating their gross estate; however, any earnings on the portion pulled back will remain outside of the estate.
Strategies for Charitable Gifting
1. Donor-Advised Funds (DAFs): DAFs are a great way to continue your charitable giving while having an opportunity to receive immediate tax benefits. Contributions are commonly done in a lump sum, providing a tax deduction in the year of contribution. This lump sum can then be invested in a separate account and may be used over your lifetime to gift as you see fit. This can be particularly interesting to someone looking to drive down their taxable income in an abnormally high-income year, such as the sale of a business.
Tax-Savvy Tip: Contributions to a DAF can be made with securities. If you are holding some highly appreciated stock, this can be transferred into the account without the need to sell. You will receive a deduction equivalent to its fair market value, and once it’s in the account, it can be liquidated without you or the charity paying tax.
2. Qualified Charitable Distributions (QCDs): For those age 70.5 or older, QCDs allow you to transfer up to $105,000 per year directly to a qualified charity. Later in life, this can also satisfy outstanding required minimum distributions without incurring income taxes on the gifted amounts. This gifting method can be advantageous for those who have most of their wealth held in pre-tax retirement accounts or when required distributions surpass annual spending needs.
In Summary
Giving does not need to be left exclusively as a legacy; it can bring multitudes of joy and fulfillment while you are still living to see the outcomes. Crafting a tax-efficient strategy requires careful consideration and a good understanding of IRS guidelines to implement properly. This becomes more complex for those with larger estates that may be affected by the outcome of current regulations around lifetime gift and estate tax exemptions. Be sure to make a plan with your advisors before taking action.
The opinion of the author is subject to change without notice and must be considered in conjunction with relevant regulation, as well as subsequent changes in the marketplace. Any information from outside resources has been deemed to be reliable but has not necessarily been verified. Each individual has unique circumstances to which this information may or may not be relevant. Under no circumstances will this information constitute an offer to buy or sell and it does not indicate strategy suitability for any particular investor.
