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Charitable & Family Giving

Giving is a powerful tool for individuals and families to have a positive impact or create a legacy. If done right, it also provides estate and tax planning benefits. Learn more about these benefits and ways to utilize gifting below.

CHARITABLE GIVING • TAXES • GIFTING

Charitable Giving

Charitable giving in the U.S. reached $471.44 billion in 2019 (Source: Giving USA). This amount has increased steadily in nine out of the last 10 years. As shown below, individuals give for many different reasons which could include having a greater impact on a specific issue area or cause as well as creating a legacy (i.e. endowment for a professor, musician, student, etc.).

In the US, there is a financial benefit to charitable giving which can include:

Income tax deductions
Capital gains tax savings
Estate tax deductions

There are many ways to give to organizations and to set-up giving if the gift is expected to be long-term in nature. This could include:

Direct gift to charitable organization
Donor advised funds
Private foundation
Charitable trust

Income Tax Deductions

Charitable contributions are an itemized deduction. As long as an individual is itemizing deductions on their tax return rather than taking the standard deduction, they are able to utilize this tax benefit. To qualify for this deduction, there must be an irrevocable transfer of assets to a qualified charitable organization. In layman’s terms, this means that you can’t recall the gift in any form.

In most cases, the fair market value at the time of contribution qualifies as an itemized deduction.

Limits on deduction:

50% of adjusted gross income (AGI).
- 30% for certain organizations and private foundations.
30% of AGI for capital gain assets (e.g., investment assets).
- 20% for certain organizations and private foundations.
You can carryover excess contributions for five years.
May be further limited as part of total itemized deductions.

Reducing Capital Gains

Contributing highly appreciated securities is a powerful way to decrease or eliminate capital gains while also minimizing income tax owed.

Example

10,000 shares of stock, purchased five years ago for $1 per share.
It is now worth $10 per share.
Assume 15% long-term capital gains tax.

Alternative 1: Contribute cash from the sale of securities

Donation Value: $100,000
Capital gains tax incurred: $13,500 (15% x ($100k current value – $10k initial investment))
Net cost to donor: $23,500 ($10k initial investment + $13.5k capital gains tax)

Alternative 2: Contribute appreciated securities

Donation Value: $100,000
Capital gains tax saved: $13,500
Net cost to donor: $10,000 (initial investment)

Gifting to Individuals

Gifting to family members and others during one’s lifetime is rather common, but can have significant tax ramifications if done poorly.

Tax-Efficient Gifting Methods

Annual Gifting Exclusion

Most direct gifting of cash or property is tax-free up to $16,000 per year. If you are married, you can gift split which doubles the amount of tax-free gifting allowed ($16,000 from each spouse for a $32,000 total gift).
As of 2022, the lifetime tax-free gift amount for individuals was $11.7 million per person (charitable gifts are not factored in towards this limit).

529 Plans

A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs. Most typically these are opened for children to help save for their college education.
Gifts of cash up to the annual exclusion amount of $16,000 can be contributed tax-free each year to the beneficiary’s 529 plan. Appreciated securities are not allowed.
Most plans allow the ability to front-load the account with five years’ worth of annual exclusion gifts, which can be up to $80,000 ($16,000 x 5).

Medical & Education Expenses

Unlimited amounts can be gifted towards education as long as they are paid directly to the qualified educational institution (this exclusion applies to tuition only).
Unlimited amounts can be gifted toward someone’s medical expenses as long as they are paid directly to the qualified medical care provider. Appreciated securities are not allowed.

Gifts to a Spouse

Unlimited assets can be gifted to a spouse if they are a US citizen and you are legally married. Limits are placed on foreign spouses. Appreciated securities are allowed.

Valuation of Gifts

Appreciated Assets
The cost basis of appreciated assets is transferred to a recipient if gifted while the donor is alive. Inherited assets receive a stepped-up basis to the date-of-death value.

Depreciated Assets
In some cases, the recipient will receive a depreciated asset such as a real estate property. If the donor is alive and the asset is sold for less than fair market value, fair market value at the time of the gift will be considered the cost basis. If the asset is sold for more than the original donor’s cost, the original cost will be used to determine the gain. If the asset is sold between fair value and original cost basis, the gain or loss will be zero.

If the asset is gifted at death, the cost basis is stepped down to the value of assets on the date of the death. If the asset is sold between fair market value and original cost basis, the gain or loss will be zero.

Gifts can be a powerful form of legacy, with the potential to profoundly touch lives and provide lasting benefits. With a well-crafted gifting plan, you are able to leave something meaningful behind while also ensuring advantageous estate and tax planning over the long-term.

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