Year-End Gifting Info
Summary: In this last of our year-end planning series, we review optimal ways to give to family and charities, from donating appreciated stock to using your annual estate and gift tax exclusion to help out family or help fund the cost of a child or grandchild’s education.
If or when you’re fingers start to strain from wrapping presents, you might be curious to know that 30% of annual giving in the U.S. happens in December, with about 10% of all annual donations coming in the last three days of the year.
In 2023, Americans gave $557.16 billion to charity. The largest source of giving came from individuals, who contributed $374.40 billion, representing 67% of total giving. 19% of total nonprofit giving came from foundations in 2022, for an estimated total of $105.53 billion.
The majority of charitable dollars went to the following sectors: religion (26%); human services (16%); education (16%); and grantmaking foundations (14%).
People choose to give for a variety of reasons, but there are two primary drivers why gifting has become an important part of people’s lives (and their financial plans). The first is altruism. Humans are a cooperative species and many people give because they want to help others. There is plenty of research suggesting that giving has positive effects on our mental and physical health.
The other driver is the income and estate tax benefits of giving. Generally speaking, each dollar donated to a qualified charity in a year can reduce a taxpayer’s income by the same amount, up to 30% of adjusted gross income for non-cash assets and 60% for cash. For someone in the top 37% federal tax bracket, a $10,000 donation saves $3,700 in taxes. So you could argue there’s only upside when you get to reduce your income tax and support a cause you love.
Keep in mind that with the state and local income tax deduction (SALT) still limited to $10,000 in 2024, most taxpayers are taking the “standard deduction” ($14,600 filing singly and $29,200 married filing jointly) instead of “itemizing” their deductions. You don’t get a deduction for charitable contributions unless you itemize.
If you already make regular annual gifts, then you could consider “bunching” deductions in 2024 and then skip them for the next few years. For example, if you regularly give $5,000 to a charity each year, you could consider giving an appreciated stock worth $25,000 in your portfolio to your favorite charity and accelerate five years worth of gifts (I doubt the charity would mind!). This may create a situation where your itemized deduction may exceed the standard deduction and you’ll create a charitable deduction for income tax purposes. Then you can add the $5,000 that you normally would have donated back to your portfolio each year for the next five years.
If you don’t already make regular annual gifts, but have high income, some appreciated stocks and want to create an income tax deduction, then you could consider giving to a Donor Advised Fund (“DAF”). Like donating directly to a charity, you’ll get a deduction for the fair market value of what you donated (up to 30% of your 2024 adjusted gross income for donations of long-term appreciated assets) and then you can take your time deciding where you want these funds to go and continue to invest them and grow them tax-free while you decide. The DAF can sell the stock you contributed and eliminate capital gains tax (as long as you’ve owned it for more than a year) and you’ll have the full amount of your contribution to donate to causes you care about. DAFs are the fastest-growing charitable giving vehicles in the U.S. and are offered by both Fidelity and Schwab.
Making lifetime gifts is also one of the most common, tried-and-true strategies to reduce estate tax liability. With the estate tax ranging from 18% – 40% over the $13.61 million per taxpayer lifetime threshold in 2024 (which is set to be cut in ½ in 2026 depending on Congress), there’s still incentive to lower the estate tax burden for those to whom it applies.
If you prefer to help family or friends and get to see this while you are still alive, then gifting directly to them can be very rewarding. Anyone can give anyone $18,000 in 2024 (the gift tax annual exclusion amount) without triggering gift taxes. If you happen to give $19,000 by mistake, then you’ll have to file a gift tax return, but most likely won’t owe any gift tax as a result. The reason is because you can apply the $1,000 you gave above the annual exclusion amount toward your lifetime exemption, which means you’ll reduce your $13.61 million lifetime exemption by $1,000.
Married spouses can combine their $18,000 annual exclusion to give $36,000 to anyone, including your children and grandchildren. For a couple with two married children and four grandchildren, this could easily add up to $288,000 in 2024 alone (gifts to children and their spouses and each grandchild; 8 x $18,000 = $288,000). These gifts will help to reduce your taxable estate, but have no impact on your annual income tax in the form of a deduction.
If education is part of your family ethos, then you may prefer to give to a qualified tuition program (529 plan) instead of giving money outright to your grandchildren. In this case, you are limited to the same $18,000 cap (in 2024) or you can “superfund” it with up to 5x the annual gift tax exclusion amount ($90,000 in 2024). This allows you to invest a larger sum of money sooner and then you’ll have to wait five years before you can add any more funds to the 529 plan. This type of giving could be extremely valuable to both your children and your grandchildren, particularly if you do this when the grandchildren are very young (and the funds you gifted have many years to grow tax-deferred before using it, tax-free, for qualified education expenses).
There is no limit to the amount that an individual can contribute, tax-free and directly for qualified education expenses. This includes tuition, fees and other related expenses required for an eligible student enrolled at an eligible educational institution. A similar rule applies for medical expenses. As a result, direct payments for education and/or medical expenses allow family members to provide support in excess of the annual gift tax exclusion amount. Like other gifts to individuals, and as mentioned above, these gifts will reduce your taxable estate, but have no impact on your annual income tax in the form of a deduction.
Lastly, let’s not forget qualified charitable deductions (“QCDs”). A QCD is a direct transfer from your IRA custodian, payable to a qualified charity. QCDs can be counted toward satisfying your required minimum distributions (“RMDs”) from Traditional, Rollover, SEP & Simple (inactive) and even Inherited IRAs. The maximum limit is $105,000 in 2024 and keep in mind that this is only available if you are at least 70.5 years old or older. Any amount donated above your RMD does not count toward satisfying a future year’s RMD and, in order for a QCD to count toward your current year’s RMD, the funds must come out of your IRA by December 31.
There is a quote that happiness doesn’t result from what we get, but from what we give. This is one of the reasons that your ACM Wealth Advisor chose their career…in order to help people. In a time of continued uncertainty in our country, our local communities and throughout the world, giving fills critical gaps in the many causes we all care about. The neurons in the portion of the brain associated with a sense of satisfaction start firing when a person chooses to donate according to a series of studies. It’s a fascinating reminder of the intrinsic motivation that many people share to try to make the world a better place.
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