What Are Tax-Focused Gifting Strategies?
While engaging in acts of giving is generally driven by personal and emotional factors, it’s important to consider the potential tax implications. Tax-focused gifting strategies, such as donor-advised funds and qualifying charitable contributions, can help you maximize your charitable contributions while minimizing your tax liabilities. Below, we’ll cover tax-focused gifting strategies and how they work.
Overview of tax-focused gifting strategies
Tax-focused gifting strategies are methods you can use to give to others while minimizing the amount of tax you will owe.
Below we’ll cover some of the most popular tax-focused gifting strategies and who they may (or may not) be right for.
Annual gift tax exclusion
If you transfer assets, such as cash or stocks, to a family member or friend, you may be subject to a gift tax unless the annual gift tax exclusion applies. If your gift excluded the annual exclusion amount, you must file IRS Form 709.
If you plan to give a gift to a family member, such as a child or grandchild, utilizing the annual gift tax exclusion can help minimize your tax liability. The annual gift tax exclusion is $18,000 for the 2024 calendar year. That means you can give $18,000 to each of your children and grandchildren without paying taxes on the gifted amount.
If you’re married, both you and your spouse can give up to $36,000 while still falling under the annual gift tax exclusion. For example, if you want to give a cash gift to your two grandchildren, you and your spouse can give each grandchild $36,000 per calendar year without triggering the gift tax.
Utilizing the annual gift tax exclusion may be right for you if you want to lower your taxable estate and make gifts during your lifetime instead, rather than waiting until you pass away.
Trusts
If you believe your estate may owe estate tax, making gifts to your heirs throughout your life can be a good way to reduce the amount of taxes owed by your estate when you pass away. If you want to give more while minimizing your tax burden, consider establishing a trust. A trust may help you avoid the gift tax and gift more than the annual exclusion by using trusts.
Establishing a trust is also a way to ensure your gifts aren’t spent frivolously. Instead of giving gifts directly to your beneficiaries, you can place the gifts into a trust. As the Grantor of the trust, you set the terms, including when and how much the beneficiary receives. You can also make it so distributions can only be made under certain circumstances, such as medical or educational purposes.
Donor-advised funds
Donor-advised funds have gained popularity as a tax-efficient vehicle for charitable giving. According to Fidelity, donor-advised funds are the fastest-growing charitable giving vehicle in the United States. You can think of donor-advised funds as an investment account with the sole purpose of donating to organizations that matter to you.
You can use cash, stocks, cryptocurrency and more to fund your donor-advised fund. Contributions to a donor-advised fund are generally immediately tax deductible. Contributions to a donor-advised fund are irreversible–once you deposit cash or other assets.
Qualifying Charitable Contributions
Qualifying charitable contributions (or QCDs) permits those who are 70 ½ years old or older to donate as much as $100,000 annually to charities directly from their IRA instead of taking their IRA minimum required distribution (RMD). IRAs that are eligible for QCDs include Traditional, Rollover, Inherited, SEP and SIMPLE IRAs. Only inactive SEP and SIMPLE plans are eligible.
Starting from the age of 73, you must start taking distributions from your IRA (even if you don’t need the funds), which increases your taxable income. Instead of taking the RMD and paying taxes on the income, you can transfer the money directly to a charity of your choice and avoid the potential tax hit. You must complete the QCD by your RMD deadline (generally December 31st) for it to count towards the current year’s RMD.
Conclusion
Tax-focused gifting strategies are a great way to give while minimizing your tax liability. The right gifting strategy for you depends on your financial situation, goals, and the legacy you wish to leave behind. Consider consulting with a financial planner who can assess your overall financial picture and determine a tax-focused gifting strategy that makes the most sense for your needs.
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