Manage Your Gifts in a Taxwise Manner

Aug 19, 2021 | TaxesHeirsCharityDonor Advised FundReal Estate

Prefer to listen rather than read? Pair this post with Deliberate Money Moves Podcast: Manage Your Gifts in a Taxwise Manner.

We don’t usually think of managing gifts for tax purposes, but as you begin thinking about how you want to share your wealth it becomes very important.

There are two types of gifts I’m thinking about here, charity and the gifts to your heirs.

Charitable Gifts

When you give to a qualified charity, you can deduct from your income the amount of the gift for tax purposes. So it’s as if this income never existed.

You get an extra boost if, instead of giving cash you give property or stock that has appreciated. This is because you get the tax deduction at the current market value and you don’t have to recognize any capital gain for tax purposes.

Further, depending on exactly how much you give each year, you may want to consider lumping your gifts into specific tax years to maximize your deduction and then take the standard deduction without recognizing any charitable giving in other years. This way you get the full reduction of your taxes from your giving and you also get to enjoy today’s higher standard deduction in the off years.

Donor Advised Fund

If you want to lump your donations but don’t want to give that much money to charity all in one year, you can create a Donor Advised Fund or DAF.

A DAF allows you to take a big deduction for your taxes in one year and then gift the funds from the DAF in future years. You don’t even have to know which charities you will ultimately give to because you are taking money today and placing in the DAF with no ability to take the money back out.

At any time in the future when you are ready, you instruct the DAF to give the funds to the charity of your choice.

There are many other ways of structuring gifts to charity so if you are planning to give a significant portion of your funds away over your lifetime, I suggest you do your research.

Gifts to Your Heirs

In terms of giving money to your heirs we need to take a different perspective.

First, you must decide if you want to start giving them money before you die. There is an annual exemption for gifts of $15,000 per person. This means that a married couple can give to their married son or daughter a total of $60,000 without paying any gift tax.

This is possible because the $15,000 limit applies to each person. In other words, dad can give $15,000 to each spouse, and mom can give $15,000 to each spouse for a total of $60,000.

It Doesn’t Stop There

Everyone has a limit to the amount they can give above this annual gift through their lifetime and even after death without paying gift taxes. This is called the Estate or Gift Tax Exemption and it is currently $11.7 million per person, though it will likely be reduced at some point.

This means once you’ve exhausted your $15,000 annual limit you can give an additional amount up to a total of $11.7 million in total to all receivers. The downside is that you must forever track those gifts on your tax forms going forward in order to avoid paying tax.

To make the transition easier and reduce overall tax, many people will start a gifting program for their kids, giving them the annual limit each year to begin transitioning wealth to the next generation.

Gifting Property

Another area to plan gifting to your kids arises if you plan to give them the family home. The kids not only get a step-up in basis, meaning the potential for capital gains tax is greatly reduced, but they may qualify to keep your tax value base for property tax purposes, at least in California.

All these rules are potentially changing so it’s important to stay on top of what really is taxwise in terms of managing your gifts.

Here’s this week’s Best Financial Life tip of the week: Manage Your Gifts in a Taxwise Manner.

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