As we approach the holidays and the end of the year, many people plan to make gifts in November and December. Year-end gifts offer an opportunity to take advantage of tax deductions and encourage charitable planning for the year ahead. It is also a season of personal giving when we celebrate Christmas and Hanukkah. Whatever inspires your generosity this month, there are many gifting strategies that may be helpful for you. Let’s explore some giving concepts that are financially wise and tax wise.
- 529 Plans are great savings devices for funding college education and a terrific alternative to giving your younger family members more “stuff.” Earnings and growth are tax-free if the student spends the money on qualified college expenses such as tuition, books, room & board, and required supplies (such as a computer). At the birth of a grandchild, start one for that little peanut and then inform the other family members that you’d be happy to be a steward for these tax-favored funds.
- Annual gift limit. If you will have a taxable estate, you can reduce future estate taxes at your death by giving up to $15,000 per person to your loved ones (if you’re married, you and your spouse could gift $30,000 to each person). Certainly, you want to bless them but not enable them. Think creatively about your cash gifts: it could take the form of paying down a car loan or making a principal payment on a student or home loan.
- Pay a child/grandchild’s tuition. If you pay a person’s tuition directly to the college, it is not counted against the $15,000 per person gift limit. Beware! The payment must be made directly to the institution, not the student to be excluded from the $15,000 limit.
Many of us no longer itemize our deductions because the Standard Deduction nearly doubled in 2018. For a married couple both age 65+, the 2019 Standard Deduction is $26,600. Let’s look at two ways to get a tax break for your charitable giving even if you don’t itemize.
- Qualified Charitable Distributions. If you are at least age 70 ½, you can donate directly from your IRA account and  the distribution is treated as nontaxable, and  it is treated as part of your required minimum distribution (RMD). Your adjusted gross income will be lower which might yield other tax benefits (possibly lower taxation of your Social Security benefits or maybe prevent you from moving into higher Medicare tax tiers). Even if you have already fulfilled your RMD for the year, it might still be tax-efficient to give from your IRA rather than your checking account.
- Gift appreciated stock. If you have stocks or mutual funds with built-in gains, when you donate the shares to charity, you avoid the capital gains tax. And if you do itemize, the full market value of the shares donated becomes a tax deduction—the best of both worlds!
The team at Inspired Financial hopes this season of giving blesses you, your family, and the causes that you support which benefit our society.