For many people, the holidays are a time for giving back — whether that means donating to a favorite charity or helping out a family member financially. Before you make a donation or gift during this season of giving, however, it’s important to choose the right strategy, paying close attention to potential tax and legal implications.
You’ve likely given some thought to the charitable organization you’d like to benefit and the amount you plan to donate. But have you considered the charitable giving vehicle you’ll use to make your gift? Here are some of the options:
Outright gifts of cash or property benefit charitable organizations by providing immediate resources. Be sure to keep your receipts or bank records to validate any income tax deductions you wish to claim. Keep in mind that you may need a professional appraisal to qualify for a tax deduction on certain noncash contributions.
A donor-advised fund is a philanthropic vehicle that allows donors to make a lump-sum charitable contribution and then recommend grants from the fund. And indeed, the tax advantages largely explain why their popularity has soared in recent years.
Charitable remainder trusts.
With this type of trust, the donor receives income from the trust for his or her lifetime, the lifetime of another person, or a period of up to 20 years. At the end of the specified term, the remaining trust assets are distributed to a charitable beneficiary. The greatest benefit of a charitable remainder trust is that you can take advantage of immediate tax benefits while continuing to utilize the assets, as you may deduct the present value of the charitable remainder interest. On the downside, charitable trusts tend to be complex to set up and usually require legal and administrative support.
Charitable gift annuities.
A charitable gift annuity is a contract between a donor and a charity with the following terms: As a donor, you make a sizable gift to charity using cash, securities or possibly other assets. In return, you become eligible to take a partial tax deduction for your donation, plus you receive a fixed stream of income from the charity for the rest of your life.
A private foundation is a charity established by an individual, family, or corporation. Although it offers donors a great deal of control over their gifts, a private foundation can be costly to administer, and it must adhere to a strict set of rules designed to ensure that it carries out its charitable purpose.
If you wish to give to charity posthumously, you may make bequests by way of your will, trust provisions, or beneficiary designations. Although bequests offer simplicity and are easy to set up, they are not income tax-deductible during your life.
Gifting to family members
Giving back doesn’t always mean giving to charity. Gifting to family members can be just as rewarding, and it may also be an effective way to transfer wealth while reducing or avoiding taxes. Here are several common strategies for gifting to family members:
Making an outright cash gift.
In 2018 you could give amounts up to $15,000 to each person, gifting as many different people as you want, without triggering the gift tax. Gifts to a spouse who is a U.S. citizen. Gifts to foreign spouses are subject to an annual limit of $152,000 in 2018. This amount is indexed for inflation and can change each year.
Paying college tuition or medical bills directly.
If you’re paying tuition or medical bills, paying the school or hospital directly can help avoid the gift tax return requirement.
Contributing to a 529 plan.
In 2018, deposits to a 529 plan up to $15,000 per individual per year ($30,000 for married couples filing jointly) will qualify for the annual gift tax exclusion, making this a great gift for a family member.
Contact the tax team at TMH CPA and Consulting firm to learn more about tax strategies for this season of giving.