Winston Churchill once said, “We make a living by what we get, but we make a life by what we give.” Charitable giving and gifting allows you to not only support the causes you care about and pass your assets to your family and friends, but it also allows you to leave a legacy that will pass the test of time. While charitable gifting and giving can be very rewarding, with the proper strategic planning, it can also be very tax efficient. Tax savings from charitable gifting and giving can come in the form of income tax savings and estate tax savings. By using the right strategies, you can increase the impact of your gift while creating a great tax benefit for yourself.
Below are five ways to give more tax-efficiently:
1. Give money to loved ones. You can give tax free gifts to family and friends to pay for medical expenses, educational expenses or to simply gift cash. You can give up to $14,000 annually ($28,000 for spouses who “split” gifts) to any number of individuals without incurring gift tax. Amounts over the annual limit apply toward a lifetime exemption amount and will require a gift-tax return to be filed.
2. Start an education fund for a child. Some say that they greatest gift you can give a child is an education. Using a 529 plan, you can give five times more than the annual tax-exempt limit ($14,000) for a maximum of $70,000 (or $140,000 for spouses who “split” gifts) in a single year, without incurring gift tax. Your initial investment can grow to cover future tuition expenses for a child. Simply file a gift-tax return to treat the gift as if it were made in equal payments over five years.
3. Donate appreciated securities. You can donate appreciated securities directly to charity to avoid capital gains taxes and receive a larger charitable deduction as long as you itemize your deductions. The deduction is limited to 30% of your adjusted gross income instead of the usual 50% limit. However, you can carry forward unused deductions for five years.
4. Donate your required minimum distribution from your individual retirement account. Once you reach retirement age, your IRA accounts may require you to receive a minimum distribution. You can donate this distribution directly to charity to exclude the distribution from your taxable income (up to $100,000). Certain conditions must be met; The account holder must be at least 70½ years old as of the date of the distribution, the distribution must be made to public charities, the full payment to the charity would have to qualify as a charitable contribution and the distribution must be a direct transfer from the IRA trustee to the charity.
5. Give valuable items to charity. You can give away personal belongings to charity and deduct the fair market value from your taxable income. Be sure to have an appraisal for items worth more than $5,000 prior to donating. You must itemize deductions to deduct charitable donations.
There are more sophisticated ways to give and gift such as charitable remainder trusts, pooled income funds, private foundations and donor-advised funds. These vehicles enable you to further pass on your commitment to philanthropy in a tax-efficient way. Funding a charitable vehicle gives you a current-year income tax deduction while removing assets from your taxable estate.
While giving to others can be very rewarding, it can be very tax efficient as well. Discuss your options with a professional to make sure your plan is the most beneficial for everyone involved.
This article was originally published in the Maryland Construction Network’s Networked & Connected Newsletter.
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