Know Your Options for Financial Gifts and Charitable Giving This Holiday Season

By Judy Loy 
ChFC®, RICP® and CEO of Nestlerode & Loy, Inc.

With the holidays and the end of the year approaching, people are thinking about gifts and charitable giving. There are many ways to give, but some ways have more advantages than others. If you are lucky enough to have funds or investments which you feel you can give, here are some various ideas.

To determine if they are right for you, consult with your advisor and accountant. The scenarios in this article are simplified and need further review before undertaking any of the options noted.

The most common idea is to give to children or grandchildren. When gifting to family or friends, the tax advantage comes from removing it from your estate. It also permits the donor to see the benefits of their gift while they are alive. Currently, the gift tax exclusion permits an individual to give up to $15,000 per person without incurring tax consequences. If you go over this amount, you, as the donor, may be liable for the taxes. A father and mother can gift $30,000 to their daughter or son and that is called ‘gift splitting’ because a married couple can double the annual exclusion. On top of that, the couple could gift $60,000 to their daughter or son and their spouse.

Rather than giving money directly, gifts of cash can be placed in trusts and invested for children through a custodial account called Uniform Transfer to Minors Act (UTMA). Money put into these accounts are considered gifts to the minor and must be used for their benefit. The assets in the account become the property of the minor when they reach the age of a majority in their resident state. In Pennsylvania, this means a UTMA account should be put in the beneficial owner’s name (the former minor) when they reach age 21. At that point, they may spend that money at their discretion.

Another vehicle to gift to a child or grandchild is a 529 plan. These plans are geared strictly for future, higher education. There are two types of 529 plans: prepaid tuition plans and education savings plans. Prepaid tuition plans are sponsored by state governments and education savings plans are investment accounts. Pennsylvania is generous with their 529 benefits. Contributions to Pennsylvania and non-Pennsylvania 529 plans, up to the annual exclusion ($15,000 in 2018), are deductible in computing Pennsylvania taxable income. Some states don’t permit tax deductions, or they are limited to their in-state plan only. Given the tax advantages for higher education and their deduction, 529 plans are something to consider. Consult with a trusted advisor about the details, different plans, to be sure a 529 is appropriate for you and which account might be the best fit.

For affluent families, they may pay directly for tuition or medical expenses as they arise. If they pay directly to the university or medical institution, there is no limit on the amount they may gift (no $15,000 annual limitation). This means a grandparent could pay for their grandchildren’s education, not face tax consequences and remove it from their estate.

Holidays and the end of the year are typically a time for giving not only to family, but also to charities. Charitable giving is a good feeling and when giving to a qualified non-profit (501(c) organization by IRS code), gifts are deductible for tax purposes. Starting in 2018 with the tax law changes, it is less likely that deductions will be taken by taxpayers for their charitable contributions. Itemized deductions, which typically include home mortgage interest and charitable gifts, are used to reduce tax burdens and in place of the standard deduction. In 2018, the standard deductions almost doubled. Filing Single is a $12,000 standard deduction and filing married jointly went to $24,000. This means that for a married couple who utilize their itemized deductions to benefit tax-wise, they would need to total over $24,000.

For a person over 70 who has an Individual Retirement Account, there still is a very beneficial way to give to charity. After age 70 ½, an investor must pull required minimum distributions (RMD) from their IRAs. Any money taken from a traditional IRA is taxable as income. If the investor must take the RMD money out but does not need it to live on, they may send it directly from their IRA to a qualified charity and not be taxed on the withdrawal. This option is called a Qualified Charitable Distribution (QCD).

Another way to gift to a charity as an investor is to transfer appreciated securities. Let’s say you took a chance on Apple (AAPL) 10 years ago and have a large gain that is too large a part of your holdings. Instead of selling the shares, gifting the shares directly to the charity may be useful. If the shares are gifted, you do not take the realized gain. The average market value on the date of the gift is considered the gift for your tax purposes. Because the charity is tax exempt, the organization would not have to pay taxes on the gain and the full proceeds could be used for their cause.

Gifting during the holidays is a meaningful exercise. To take advantage of these options, contact a trusted advisor, and have a great holiday season!