During holiday seasons, you might think about different types of gifts for family members or for your favorite charity. A financial gift is certainly a generous offering, but it may also be something to think about come tax time.
This article is designed to give you an overview of things you may want to consider when making a gift in the here and now, while touching on longer-term tax relevance for both you and the recipient. We’ll also cover some estate considerations for gifts you make now and as part of your future legacy.
Remember, the concepts highlighted here are for illustrative purposes only and are not a replacement for real-life advice. Please contact a tax or legal professional before implementing an estate strategy or modifying your existing approach. If you would like an introduction to a professional from our network, please let us know.
Giving to the Family
If you’ve done well, it makes sense that you might want to extend your good fortune to your loved ones. You may also seek to make sure that when you’re sharing that wealth, you’re following the Internal Revenue Service (IRS) guidelines.
You’ve likely heard about the gift tax and want to make your gifts while managing any taxable situation. This is your responsibility as the IRS puts the onus for taxes on the giver. If a gift is a taxable event and you don’t pay, the responsibility may fall to the beneficiaries after the giver’s death in the form of estate taxes. These rules are in place to prevent an individual from simply, say, giving their entire fortune away before they pass.
Exceptions for Spouses
In many instances, gifting rules are different for a spouse. Gifts between spouses are unlimited and generally exempt from the gift tax. There’s one notable exception, though. If your spouse is a non-U.S. citizen, there’s a limit to those gifts, up to $157,000 per year. (This is the limit for 2020; it’s linked to inflation.)
The gift limit for non-spouses is $15,000, and it applies to both cash and non-cash gifts. So, if you bought your son a $15,000 motorcycle, it’s the same as writing a $15,000 check to your daughter or bequeathing $15,000 in stocks to your niece. Spouses have their own separate gift limit. For example, your spouse could also write each child a $15,000 check from the account you share together.
Education and Healthcare
The gift tax doesn’t apply to funds for education or healthcare. So, if your son breaks his leg riding that motorcycle, you can write a check to the hospital. If your daughter goes back to college to become a naturopath, you can write a college tuition check. However, this only works if you make the check out to the institution directly; if you write the check to your beneficiaries (i.e., your children), you might incur the gift tax.
The Lifetime Gift Tax Exemption
What if you were to go over the limit? The lifetime gift tax exemption would go into effect, and the rest would be reported as part of the lifetime exemption.
Unlike the annual exemption, the lifetime exemption is cumulative. For 2020, that lifetime exemption is $11.58 million. Your spouse has their own $11.58 million lifetime exemption.
These examples are for illustrative purposes. You may want to consult with a financial professional who can provide some information on estate strategies and gift-giving approaches.
Giving to Charity
Direct Gifts
According to Giving USA 2020, Americans gave an estimated $449.64 billion to charity in 2019. That was one of the highest totals in the more than 60 years since the report was first published.
Americans give to charity for two main reasons: to support a cause or organization they care about or to leave a legacy through their support.
When giving to charitable organizations, some people elect to support through cash donations. Others understand that supporting an organization may generate tax benefits. They may opt to follow techniques that can maximize both the gift and the potential tax benefit. Here’s a quick review of a few charitable choices:
Direct gifts are just that—contributions made directly to charitable organizations. Direct gifts may sometimes be deducted from income taxes, depending on your individual situation. Charitable gifts can take many forms, such as:
- The donation of stocks and bonds
- A gift of personal luxury items for a charity auction
- Tickets, gift certificates, or vouchers for goods or services such as travel or art events
- A simple check written directly to the charity or nonprofit organization of your choice
Charitable Gift Annuities
Charitable gift annuities are not related to the annuities offered by insurance companies. Under this arrangement, the donor gives money, securities, or real estate, and in return, the charitable organization agrees to pay the donor a fixed income. Upon the death of the donor, the assets pass to the charitable organization. Charitable gift annuities enable donors to receive consistent income and potentially manage their taxes.
Pooled Contributions
Pooled-income funds pool contributions from various donors into a fund, which is invested by the charitable organization. Income from this fund is distributed to the donors according to their share of the fund. Pooled-income funds can enable donors to receive income, manage their tax burden, and make future gifts to charity.
Gifts in Trust
Gifts in trust enable donors to contribute to a charity and leave assets to beneficiaries. Generally, these irrevocable trusts take one of two forms. With a charitable remainder trust, the donor can receive lifetime income from the assets in the trust, which is then passed to the charity when the donor dies. In the case of a charitable lead trust, the charity receives the income from the assets in the trust, which passes to the donor’s beneficiaries when the donor dies.
Using a trust involves a complex set of tax rules and regulations. Before moving forward with a trust, consider working with a professional who is familiar with these rules and regulations.
Donor-advised funds are funds administered by a charity to which a donor can make irrevocable contributions. This gift may have tax considerations, which is another benefit. The donor also can recommend that the fund make distributions to qualified charitable organizations.
Don’t Do It Alone
While you may be happy with your current gifting strategy, it’s also possible that you’re ready for a more advanced strategy to take into account all the ways you give back. Let’s talk about how you can maximize your giving and all the benefits it may offer. We welcome the opportunity to help you assess the approach that may work best for you.
Sources:
NerdWallet, July 6, 2020
IRS.gov, January 6, 2020
Giving USA Foundation, 2020
Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this content, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for you or your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter (article) serves as the receipt of, or as a substitute for, personalized investment advice from Searcy Financial Services, Inc.
The content of this letter does not constitute a tax or legal opinion. Always consult with a competent professional service provider for advice on tax or legal matters specific to your situation. To the extent that a reader has any questions regarding the applicability of any specific issue discussed in this content, he/she is encouraged to consult with the professional advisor of his/her choosing.
Published for the blog on January 6, 2021 by Searcy Financial Services, your Overland Park, Kansas Fee-Only Financial Planner and Investment Manager.
