Generally, when a person decides to give to others, the motivation is rooted in altruism. Someone might have a personal connection to a cause or charity, so they want to make a donation. Someone might have a deep love and affection for a friend or family member, so they want to help pay for college or a few of their bills. Someone might feel a deep sense of social duty, so they look for opportunities to help those who are disadvantaged or haven’t experienced the same amount of privilege as them.
Whatever the reasoning, there is a clear consensus: When we give to others, our own lives are improved. Study after study finds that people who practice generosity have increased happiness, satisfaction, and joy over those who spend an equal amount of money on themselves.
This fact is not lost on us as a country. In 2020, charitable giving reached a record $471.44 billion, up by 5.1% from 2019. In fact, there have only been five years since 1977 when the U.S. population did not increase its charitable giving year over year.
Beyond the less tangible advantages of generosity, there are financial giving strategies to maximize the benefit of your gifts, especially in terms of managing your taxes.
The concept that probably comes to mind first when thinking about the financial benefits of charitable giving is the income tax deduction. In essence, a person can reduce their taxable income by whatever amount they donated to a qualifying charitable organization. However, many times this deduction is only available to taxpayers who itemize their deductions.
Since the increase of the standard deduction in the 2017 Tax Cuts and Jobs Act, the number of people who use the standard deduction has sharply increased, and thus the number of people who itemize and can use this deduction has decreased. Having said that, it is still available, and can be deducted up to 100% of your adjusted gross income.
Qualified Charitable Donation (QCD)
If you are over age 70.5 and have a traditional IRA, you can contribute to qualified charities directly out of your IRA. Typically, any funds you pull out of your IRA are 100% taxable to you. However, if you direct those funds toward a charity, rather than having them sent to your bank account, none of the IRA distribution counts for your taxes. The distribution goes from being 100% taxable to 0% taxable, up to a limit of $100,000.
The benefit can really compound once required minimum distributions (RMDs) come into play. After IRA owners reach age 72, the IRS requires them to begin taking out a portion of their account every year. The government wants to get its tax dollars and so prevents people from leaving their funds in their IRA, earning tax-deferred gain for their entire lifetime.
Every IRA owner must redeem a portion of their account annually based on the value as of the prior year-end and the divisor that correlates with the age they will turn in that year. Whatever amount that is contributed to charity as a QCD counts toward your RMD and escapes taxation.
Annual Gifting Exclusion
One question that often comes up is “How much can I give to my child/friend/parent without causing any gift tax issues?” The answer can get complicated depending on your net worth, how large your estate is when you pass away, and how much you plan on gifting over your lifetime.
The good news, though, is that there is an annual gifting exclusion amount that bypasses all those considerations. Any person can give another person $15,000 per year. There is no limitation to how many people you help, so as long as you keep your individual gifts under that exclusion amount, you don’t have to worry about any tax consequences or filing any gift tax returns.
If you are looking to make a gift larger than that and you are married, you and your spouse can each give $15,000 to any individual for a total of $30,000. If you are not married, you could split the gift over a few calendar years.
Gifting Low-Basis Assets
Another way to manage taxes when making a gift to either charity or an individual is to consider gifting an asset “in kind” instead of giving cash.
Say, for example, you have a couple of shares of a stock you purchased a decade ago that have dramatically increased in value. Instead of selling that stock and gifting cash, you could transfer that stock from your name directly into the name of the gift recipient.
This does two things for you: The first is that it transfers any capital gains taxes that would be due upon the sale of the stock from you to the recipient. This is particularly advantageous when the recipient is in a lower tax bracket.
The second benefit is that it moves any future income that the stock could generate from dividends out of your taxable income and into the recipient’s taxable income, should they decide not to sell the stock.
If you want to understand the best financial options for gifting, you might decide to work with a financial advisor. Our Spokane, WA fee-only financial planning firm provides clients the information they need to make smart decisions about their financial gifts.
While information can help inform your decisions about how to make financial gifts, the importance of intangible acts of generosity cannot be overexpressed.
Over and beyond the gifts of money that we make, we can be generous with our time by volunteering with an organization that needs some manpower. We can be generous with our compliments, making sure that those around us feel appreciated and important. We can be generous with our understanding, offering grace and patience to those who need it. And we can be generous with our kindness, trying our best to bring joy into the lives of others.
Schedule a complimentary insight meeting to discuss your situation and how we may be able to help.