To Inform:

“Man… cannot fully find himself except through a sincere gift of himself.” This quote illustrates well the idea that, as human beings, we often find the greatest joy and satisfaction by giving our time, talent, or treasure for the benefit of others. The late Pope Saint John Paul II called this idea “The Law of the Gift.” A simple idea, but not an easy one.

Without a plan and proper guidance, the laws of the gift, or the IRS rules regarding the gifting of assets, can seem neither simple nor easy. Understanding a few key concepts can help those of a charitable disposition make gifts in a tax-efficient manner, and to the benefit of all parties involved. We don’t give because it benefits us, but a smart gifting strategy can help us to maximize the impact of our giving now and in the future.

Giving to Individuals

Current tax law allows an individual to make a tax-free gift of up to $15,000 ($30,000 for couples) to an unlimited number of individuals per year. These do not count against the lifetime gift and estate tax exemption amount for the giver, and can be made in cash or in assets of this value, i.e. shares of stock.

• Example: Bob and Sally have four children. Their estate is large enough to potentially face a 40% estate tax at death. Bob and Sally are able to make annual tax-free gifts of $30,000 ($15,000 from Bob and $15,000 from Sally) to each child for a total of $120,000 per year. At the 40% estate tax rate, this could save up to $48,000 in taxes, per year, that would have been assessed to their estate at death.
• Another way to give is to make direct payments for medical or educational purposes on behalf of a recipient, i.e. a grandchild’s braces, or a tuition payment. Payments made directly to a medical services provider or to an educational institution for tuition are not treated as taxable gifts.

When and what to give to individuals

• During life, cash and other assets that have not appreciated much in value are typically the best for gifting to other individuals, as the recipient will not face substantial tax consequences for the sale of such assets.
• At death, taxable assets that have appreciated in value (brokerage accounts, trust accounts, real estate), under current tax law, may receive a cost basis step-up when passed to beneficiaries, thus the beneficiary avoids the taxes that would have been assessed on gains that happened prior to death.
• Additionally, passing Roth assets at death is ideal, as the beneficiary will not have to pay taxes on any distributions, and will continue to get tax-free growth while the assets remain in the Roth account, per IRS rules.

Giving to Charities

There is no limit to how much can be given to charitable organizations, but there are limits to how much of those gifts are tax-deductible. Once the standard deduction increased with the Tax Cuts and Jobs Act of 2017, the great majority of tax-payers who no longer itemize do not receive additional deductions for charitable gifts. For those taxpayers, the focus for charitable giving may shift away from how to get deductions, to avoiding taxes altogether on assets that can be transferred or gifted to charity.

When and what to give to charity

• During life, giving highly-appreciated assets such as long-held shares of stocks, bonds, or mutual funds allows the giver to avoid the tax on the sale of those assets. The charitable organization can sell that asset and pay no tax on the gains, as they are tax-exempt.
• Additionally, individuals over age 70.5 may make Qualified Charitable Distributions (QCDs) from IRAs directly to charities, and avoid claiming those distributions as income and paying the associated taxes.
• At death, if a person plans to leave a legacy by directing a portion of their estate to charity, adding charitable organizations as partial or full beneficiaries on qualified retirement accounts is a great way to do that. While the account holder is living, that IRA, for example, grows tax-deferred, but at death it is passed to an organization who can receive the entire value of the account tax-free. Thus, Uncle Sam never taxes these dollars at all. If that same account is inherited by an individual, that beneficiary will pay taxes on every dollar that comes out of the account.

We have covered a complex topic with a very broad brush, and these rules and planning concepts require much more nuance and consideration for each unique situation. We recommend speaking with your tax advisor before executing any of these strategies.

Helping our clients think about the best ways to impact the lives and organizations about which they are passionate is a great privilege for us at The Joseph Group. If you have questions or want to start thinking about the impact you will have, please talk to your Joseph Group advisor or reach out to me directly, as we strongly believe that the sharing of your time, talent, and treasure, is a central component of living your Great Life!

This WealthNotes article was written by Nick Boyden, Wealth Advisory Associate. Nick can be reached at 614.907-8634 or nick.boyden@josephgroup.com