One of the best parts about prosperity is the power to share that prosperity with your loved ones. Doing good for others or taking care of family can fill the heart with gladness. Of course, the tax advantages are quite nice, as well.
Without a smart annual giving plan, you may find your personal fortune gobbled up by taxes. If you don’t decide where your money goes, the government will be happy to. Consider these three gift-giving strategies to make the most out of the tax sheltering power of gift-giving.
1) Know the limits
Individuals can give gifts of up to $14,000 to any other individual tax-free. Beyond that point, you may be stuck with a large bill for your generosity. The top tax rate for gifts is 40%.
If you’re married, you and your spouse can both give gifts up to that $14,000 threshold for a combined gift-giving total of $28,000 per person. There’s no restriction on who gets the gift. Tax law regards children and grandchildren the same as total strangers in this regard.
It might be prudent to give just under the $14,000 threshold at one time. That way, a birthday gift or graduation present doesn’t inadvertently trip the limit. Each of these limits is per fiscal year, not per gift, so deduct any prior gift-giving from the total amount.
There are other ways to give beyond those limits. Paying someone else’s tuition directly to an institution of learning doesn’t count toward the $14,000. This doesn’t have to be college tuition, either; private school tuition at all levels is exempted from the gift tax. The same is true of qualifying medical expenses.
Gifts to a 529 plan, a tax-advantaged college savings plan, can also be sheltered from gift taxes up to $70,000 per year ($140,000 for married couples giving together). A gift of that magnitude, though, will count as the full $14,000 gift exemption for that individual for each of the next four years. A $70,000 contribution to a grandchild’s 529 plan in 2016 will count as a $14,000 gift in 2016, 2017, 2018, and 2019.
Gift-giving now can help lower the total value of an estate for tax purposes. This is especially beneficial for estates around $5 million in value. Making gifts to reduce the size of the estate below that $5 million threshold can eliminate the potential estate tax burden.
2) Contribute directly to a Roth IRA
For working children, consider giving to a Roth IRA account in that person’s name. Gifts directly to Roth IRA’s do count against the recipient’s $5,500 IRA contribution limit, and total contributions can’t be greater than the individual’s income. Such a gift is part of the $14,000 exemption, but the tax advantages offered by a Roth account are considerable.
For starters, deposited funds can be withdrawn at any time without tax penalty. After 59 and 1/2 years of age, all withdrawals are tax-free. Plus, individuals can withdraw up to $10,000 to help with the purchase of a first home. Giving to a young professional’s Roth IRA can help set them on the path to financial success as well.
3) Maximize the benefit of charitable contributions
It’s best to give appreciated assets, like stocks and mutual funds, directly to charities. You can claim the full value of the asset, not just your basis in it. Best of all, neither you nor the charity has to pay taxes on that appreciation.
If you’ve got depreciated assets, it’s best to sell them and donate the proceeds to charity. Selling the asset allows you to harvest the capital loss and deduct the value of the donation from your income. Don’t count on such contributions to completely eliminate your tax burden, though, as charitable contribution write-offs have been reduced for high income earners.
You may also consider donating directly from your traditional IRA to a charity. People over the age of 70 and 1/2 can withdraw up to $100,000 from their IRA and donate it directly to charity. This counts as a required minimum distribution, allowing you to avoid paying taxes on an unnecessary withdrawal. This withdrawal does not get added to your taxable income, allowing you to avoid the impact of a higher income on deductions or Medicare premiums. Of course, the contribution is not additionally tax-deductible.
If you’d like more information about building a tax-advantaged annual giving plan, contact us!