Studies have shown that people would rather give than receive. By utilizing specific gifting strategies, not only can you make yourself feel better, you may also reap additional tax savings! Below is a list of tax benefits as well as charitable gifting options.
• Can be gift tax-free – In 2020, taxpayers can gift $15,000 per beneficiary without filing a gift tax return and without paying any gift tax. Any gifts exceeding this amount will reduce your estate tax exemption (estate and gift exemptions are unified), which is currently at $11.58 million. Other instances where taxpayers do not need to file a return are direct payments for tuition, medical reimbursements and gifts to spouses. In addition, annual contributions of up to $15,000 can be made to 529 savings plans tax-free as well as potentially qualifying for a state income tax deduction.
• Reduces your gross estate – By gifting assets to other individuals, you can reduce your gross estate and, therefore, the amount of your estate that may be subject to the federal estate tax. This tax is imposed on gross estates exceeding $11.58 million in 2020, and the exemption is effectively reduced by any past gifts made in excess of the annual exclusion. Additionally, gifts ensure that any future appreciation occurs outside of your estate.
• Shifts income to a lower bracket – Transferring high income-producing assets to someone in a lower tax bracket than yourself not only benefits them, it also removes this amount from your income tax return. Depending on disparity between your two tax brackets, a great deal of tax savings can be had and the recipient will receive more of that income.
• Reduces AGI – Adjusted Gross Income (AGI) is one of the more important numbers on a tax return and determines many items on the second page like deductions. By gifting income-producing assets and removing those monies from your tax return, you can reduce your AGI and therefore decrease the thresholds for certain itemized deductions (like medical expenses). Therefore, if you don’t qualify to deduct the expenses, or do but only a small portion, reducing your AGI can help you receive a higher deduction. In addition, by lowering your AGI, you may be able to reduce, or eliminate, some of the deduction and exemption phaseouts that affect high income earners. Another benefit of lowing AGI for high income earners is that it can also help to reduce, or potentially eliminate, the Net Income Investment (NII) tax. Finally, for certain individuals with lower incomes, reducing AGI can decrease the level of taxability of Social Security benefits, which would increase the net benefit received.
Charitable Giving Options
• Outright Gifts – This encompasses a direct donation of cash or property and the taxpayer receives a deduction based on the classification of the charity, the property involved, and the taxpayer’s AGI. Note that in 2020, there is a $300 above-the-line deduction for those that take the standard deduction. The donation must be made with cash.
• Charitable Lead Trust (CLT) – The charity receives income payments for a certain number of years after which point the remainder is paid out to any beneficiaries. Depending on how the trust is structured, the taxpayer either receives a one-time deduction based on the present value of income stream or ongoing annual deductions to offset trust income for the term of the trust.
• Charitable Remainder Trust (CRT) – Selected beneficiaries can receive income payments for a certain number of years after which point the charity receives the remainder. The taxpayer receives a deduction based on the present value of the remainder interest that will pass to charity.
• Private Foundation – This is an entity that supports charity through ongoing grants. The taxpayer receives an immediate deduction for a portion of the transferred property.
• Donor-Advised Fund (DAF) – This is a charitable vehicle, sponsored by a public charity. The taxpayer receives an immediate deduction for a portion of the transferred property and can recommend future grants to any public charity.
• Qualified Charitable Distribution (QCD) – QCDs are direct transfers from an IRA to a charity and can act as an alternative option for Required Minimum Distributions (RMDs). As opposed to the other options where income is recognized and a portion of the transferred property is deducted, QCDs are simply omitted from taxable income. Taxpayers over age 70½ can utilize QCDs up to $100,000 per year. Despite the fact that RMDs have been waived in 2020, QCDs can still be made.
Prior to making any gifts, you may wish to consider having a MASTERPLAN done first. This financial plan will take a comprehensive look at your financial situation and can help identify particular gifting opportunities that may best benefit your situation. Please contact Hefren-Tillotson for further details.