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How to Give Tax-Saving Gifts Before The Year Ends

A colleague and I host Women’s Circles, small events designed to educate clients and friends. Recently, over lunch, we discussed savvy ways of gifting to charity, clarified the gift tax and outlined ways to give to friends and family before discussing the more personal aspects of both giving and receiving.

During this season of giving, it is especially meaningful to hear how women of a wide range of ages and backgrounds feel about giving and receiving with grace, enabling each of us to learn what we need from one another’s challenges and successes.

Here are the smart giving tips that we talked about in the educational component of the circle. Go ahead and share them. Think of each tip like a holiday sweater: if one doesn’t fit you, give it to a friend who can rock the snowflake turtleneck look! (For related reading, see: To Donate or Not: Tips for Charitable Giving.)

Savvy Strategies for Giving to Charities

Gifting Stock: Give Appreciated Securities to Charity – You bought "Happy Donutland" stock at $25 a share. It’s now worth $100. You feel flush with cash, a little full of donuts (because you’ve been generously helping sales), and you want to donate to charity. The common way is to sell the security and give the profit. If you proceed this way, you’ll pay taxes on the $75 growth, and you’ll be left with less than $100 to give and write off on your taxes.

Instead, simply give the stock directly to charity. The charity will receive the full $100, you get to write off the $100 on your tax return, and you don’t have to pay taxes on the growth. Let the IRS get their own donuts.

Gifting IRA Distributions: Give Your IRA RMD Directly to Charity – This one is for those of us in our golden years. The year you turn 70.5, if you have an individual retirement account (IRA), you are required to start taking money out each year in a process called required minimum distributions (RMDs). This typically comes with a big tax hit. (Remember that pre-tax income you contributed? The IRS wants to start collecting taxes now.)

Say you want to give to charity. Since you have to take the RMD, why not combine the two? Gifting IRA assets to charity is your solution. Regardless of your RMD amount, if you are at least 70.5, you can donate up to $100,000 of your IRA each year directly to charity. The charity will receive the full amount. You don’t pay taxes on the amount you donate and your donation counts toward satisfying your RMD. 

As a bonus, your IRA donations reduce your risk of being pushed into a higher tax bracket, and thus the likelihood that your Medicare cost will increase. (For related reading, see: Finding Balance in Your Financial Partnerships.)

Give With Ease Through a Donor-Advised Fund – A donor-advised fund (DAF) is one of the easiest and most tax-advantaged ways to give to charities, schools, and giving campaigns. The National Philanthropic Trust likens a DAF to a charitable savings account: “a donor contributes to the fund as frequently as they like and then recommends grants to their favorite charity when they are ready.” Examples of donor-advised funds are The San Francisco FoundationThe East Bay Community Foundation, and Schwab Charitable.

The key difference with a DAF is that you get to claim the deduction for your donation to the DAF in the year you made it, but the actual dispersion to charities can happen in future years. This is a great tactic to reduce the tax hit for high-income years: when you get a high bonus, your company IPOs, you have a deferred compinsation payout, etc.

If you plan to give $5000 a year for 10 years anyway, donate the $50,000 now to the DAF, get the full $50,000 deduction now when you most need it, and make your usual charitable donations over the next decade. Or say you have made a four-year commitment to your kid’s high school capital campaign and want to make sure the promised money is earmarked—move it to a DAF so you know it’s there.

You can donate cash, investments, real estate, private business interests and appreciated stock now, receive a full tax deduction, and you can parcel your charitable support according to your own time frame; plus your gift funds can be invested while you wait. (For related reading, see: How Donor-Advised Funds Can Help Cut Taxes.)

Annual Exclusion and Lifetime Exemption Tips

  • The gift tax refers to giving to friends and family (not to your spouse or a qualified charity).
  • You can give up to $14,000 to as many people as you wish; this is known as the annual gift tax exclusion. This yearly amount will adjust for inflation after 2017.
  • The IRS doesn’t care about these gifts. You don’t have to report them. (Hence, "exclusion.")
  • However, if you give over $14,000, you’ll have to track your gifts on the IRS gift tax form. Note that it says “track,” not “pay.” No taxes are due until these excess gifts exceed your lifetime giving amount, which is $5,450,000 in 2016. (The 2017 gift tax exemption amount inflation-adjusts to $5,490,000.)
  • You pay a 40% tax on gifts over the $5,450,000 lifetime gift exemption amount.
  • Keep in mind that the gift tax form tracks all of your giving through your lifetime and at death. Most people do their major giving at death because that’s when their remaining assets are given to loved ones—and that’s why the gift tax is often also called the death tax.

529 Plans and Direct Donations: IRS Gift Tax Exceptions

Give the gift of college with a 529 plan:

  • As an individual, you can give $14,000 to a 529 plan each year.
  • You can maximize the time the money has to grow by front-loading five years of contributions at once when gifting to 529 plans (that’s $70,000 per individual or $140,000 for a married couple).

Gift the gift of a qualified direct donation:

  • Make a payment on someone’s behalf directly to a school or to a medical office (if you want to pay for your grandkid’s tuition, cover all or part of your cousin’s unexpected hernia surgery, or the like).
  • The amount does not matter when you donate directly to the organization that collects the money; you can give as much as you want, and it will not count against your lifetime giving amount.

Once more, the Mosaic Women’s Circle taught us new insights and reminded us of smart ways to honor our loved ones, our causes, and ourselves. Now you know some great ways to give generously to friends, family, and charities—not the IRS. (For more from this author, see: Healthcare Documents You Need In Place Right Now.)