It’s the most wonderful time of the year! As the 2018 tax year comes to an end, many of our affluent clients will use gifting strategies to reduce taxable income while living generously through charitable opportunities. Not only do you get to contribute to a cause that is near and dear to your heart through charitable giving, the IRS gives favorable tax treatment to these gifts. It’s truly a win-win. Which end-of-year tax strategies should you be considering during this season of giving?
- Donate your Stock to Charity. Perhaps it’s a stock you inherited or purchased years ago that you no longer find suitable for your risk tolerance. Rather than sell it and incur long-term capital gains tax, consider gifting your stock to your favorite charity. Not only will you avoid the capital gains tax, you will receive a charitable deduction for the fair market value of the stock at the time of the gift (Subject to limits. Consult your advisor for details). Many brokers will directly transfer shares to your chosen charity for you, making it a simple solution to live generously.
- Build a Charitable Trust into Your Estate Plan. Charitable gifts don’t always have to happen right now. Talk to your advisor about establishing a Charitable Remainder Trust (CRT) to plan for a gift to your chosen charity at a future date. There are 2 types of CRTs: Charitable Remainder Annuity Trusts (CRATs) and Charitable Remainder Unitrusts (CRUTs). Both of these trusts are irrevocable, so make sure that you are confident in making this permanent decision. Placing appreciated assets in these trusts will eliminate capital gains taxes for you and your chosen charity, while allowing you to still draw income from the assets (although this income is taxable to you). A CRT also removes the assets from your estate, lowering your ultimate estate tax burden. There are additional charitable trusts that you can establish depending on your situation and goals, so make sure to explore options with your advisor.
- Make a gift to a Donor-Advised Fund. Since charitable gifts are an itemized deduction on your tax return and the standard deduction is currently $24,000 per couple, people are less likely to find enough tax benefits through itemizing. One way to still make your annual charitable donations and reap a tax benefit is through gift-bunching to Donor-Advised funds (DAFs). Through this strategy, you can make several years of gifts in one lump contribution. Although you can receive the tax deduction for the full gift amount in one year, the DAF you establish can spread out contributions to your chosen charity over the course of several years.
- Use your annual gift exclusion. In 2018, the annual gift tax exclusion was raised to $15,000 from $14,000 in prior years. A married couple could each gift $15,000 to as many individuals as they like, reducing their joint taxable income. So, if you’d like to transfer wealth to family members, your tax benefits and holiday spirit are great motivators!
Live generously and tax-efficiently this holiday season through these and other gifting strategies. As with any financial planning concepts, please consult with your advisor to determine what is most appropriate for your unique situation.