How to Give Tax-Smart Financial Gifts

December 4, 2019

Parents and grandparents alike know the joy of giving, and at the holidays, we often have the pleasure of being extra generous. When it comes to finances, however, how and to whom the gift is given matters because it can impact your tax liability. Based on the recent tax law reform, here are 2019 guidelines for giving financial gifts through three key vehicles:

Gifts to charities: With standard deductions nearly doubled and many state and local tax deductions reduced, only about 10 percent of taxpayers will likely itemize under the new tax rules – down from a third of taxpayers, historically. This has profound implications on making charitable gifts. If you’re 70.5 or older, consider distributing funds tax-free from an IRA directly to a qualified charity. Up to $100,000 can be given per IRA owner, and required minimum distributions may be included. For younger donors, consider lumping multiple years’ charitable gifts into a single year, so you can itemize deductions on that year’s tax return. For example, instead of a couple gifting $10,000 annually to a charity, consider gifting $30,000 in one year, which represents three years’ worth of gifts. This allows you to itemize deductions that tax year and claim the higher standard deduction the next two years.

Gifts through estates: The annual gift tax exclusion for individuals remains the same at $15,000, but the lifetime estate and gift tax exclusion increased to $11.4 million for 2019. Given this significant change, it’s important to review existing trusts and legal documents with your attorney for potential modifications. There may be opportunities to give large lifetime gifts this year due to the high exclusion amount.

Gifts through 529 plans: A special 529-plan exclusion allows five years’ worth of gifts – up to $75,000 or $150,000 for married couples – to be contributed at once for education-related expenses. If done so, however, no other gifts can be made within the next five-year period. Keep in mind that distributions from 529 accounts count toward the income test portion of the federal financial aid calculation through FAFSA, so it’s important to consider their timing. And remember, the new tax law expanded the use of 529 funds to include K-12 tuition expenses, so in some cases, your gift can be put to good use sooner.

It’s our privilege to help you give generously this holiday season. Let’s ensure you also do it wisely. Merry Christmas!

 

Blog by Stephen O’Neill, Senior Wealth Advisor.

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