When talking with clients about their charitable inclinations, we usually get one of two general responses.
The first can be a variation on wanting the last check they write to bounce … suggesting a lack of interest in the subject.
For the others, responses focus more on learning their choices and how to go about it. This article can be of help if you are interested in the subject.
Federal tax
According to the IRS, the annual individual gift tax limit is $18,000 in 2024. That’s up $1,000 from last year’s limit since the gift tax is one of many tax amounts adjusted annually for inflation. For married couples, the combined 2024 limit is $36,000.
As an example, if you’re married and have two married children and two grandchildren, you and your spouse together can give up to $36,000 to each of your kids, their spouses, and the grandkids in 2024 … without having to file a gift tax return or pay any tax. This means you can give a total of $216,000 in tax-free gifts.
The 2024 lifetime gift limit is $13.61 million, up from $12.92 million in 2023. And, because it’s per person, married couples can exclude double that in lifetime gifts.
If you exceed the annual limit, the gift tax return you must file keeps track of that lifetime exclusion. So, if you don't gift anything during your life, then you have your whole lifetime exclusion to use against your estate when you die.
Gifting options
Even if taxes aren’t your primary motivator for your giving strategy, consider these ways to make your giving go further.
*Give through a donor-advised fund: Especially in a high-income year, a DAF can be an effective way to structure your charitable giving. A DAF gives you a low-cost way to donate stock, mutual funds, or other assets and claim a federal income tax deduction in the year you make the donation. Additionally, these assets can remain invested and potentially grow tax-free until you recommend which charities should receive a cash donation from the fund. Your adviser can locate a DAF for you.
*Give the gift of education: Interested in helping cover the ever-increasing cost of college or vocational training? Consider giving gifts through a 529 education savings plan. Anyone, including grandparents or even exceedingly friendly strangers, can contribute up to $18,000 annually—$36,000 for married couples electing to split gifts—to any individual’s 529 plan in 2024 without incurring federal gift tax or using their federal lifetime gift tax exemption.
Additionally, unique to 529 plans, the federal tax code allows you to front-load—pay ahead—up to five times the annual gift tax exclusion amount in a single year. So in 2024, individuals can give up to $90,000 per recipient in a single year, while married couples electing to split gifts can give up to $180,000.
If you have the means, you can even take advantage of six-year gift tax averaging. To do this, you can contribute one year’s worth of gifts in December, followed by five years’ worth of contributions in January, effectively making six years’ worth of contributions in just two months.
Such 529 plan distributions can be taken free from federal income tax for qualified higher education expenses. They also can be used for certain primary and secondary education expenses, apprenticeship expenses, and student loan repayments.
*Reduce your estate taxes with financial gifts: You can donate securities to qualified charitable organizations. Your tax benefits will depend, in part, on whether these securities have appreciated or depreciated in value relative to your purchase price.
For instance, if your securities have appreciated since purchase and have unrealized capital gains, donating the securities themselves would allow you to take a deduction in the year you make the donation and avoid paying capital gains tax on the appreciation.
However, if you donate securities that have unrealized capital losses, you could potentially miss an opportunity to realize those losses and offset realized capital gains. Therefore, in the case that you’re considering the donation of securities with embedded losses, it may be a good idea to sell the securities first to realize the loss, and then donate the proceeds of the sale to a qualified charity for an additional federal income tax deduction.
Importantly, donating securities that you have owned for more than a year can allow you to take a larger deduction than donating securities that have been held for one year or less.
*Use charitable remainder annuity trusts: There are certain charitable planning strategies that benefit from a higher interest rate environment, such as CRATS. With a CRAT, you as the grantor—the person who creates the trust—would create and fund an irrevocable trust and receive an income tax charitable deduction for the year the trust is funded. Note that a CRAT is an irrevocable trust. Once it’s set up, it can’t be changed.
The CRAT subsequently distributes a stated annual annuity amount—in other words, an annual income stream—to you, your spouse or other noncharitable beneficiaries. The annuity amount is typically a stated percentage of the trust’s value when the trust is funded, which must be at least 5% but no more than 50%.
At the end of the trust term, the remainder of the assets are distributed to the charity or charities indicated within the trust agreement. When the trust is created, the present value of the charities' remainder interest must be at least 10% of the trust's value.
Be sure to talk with your tax adviser about the applicability of any of these strategies before taking specific action, as the actual amounts that can be deducted can vary depending on the type of asset.
Michael Maehl is a retirement income specialist and Spokane-based senior vice president of Opus 111 Group LLC, a financial services company headquartered in Seattle. He can be reached at 509.944.1790.