By Christine Waldschmidt, JD, Vice President – Trust Advisor
With the holiday season upon us, we pause to give thanks for our blessings and the people in our lives. With the year winding down, it is also a time to think about how gifting, both charitable and otherwise, can be incorporated into strategic year-end tax planning. Charitable giving may be leveraged by utilizing income tax deductions, and estate tax planning may be enhanced by utilizing the annual gifting exclusion. Deciding what type of assets to gift (cash vs. noncash/securities) should involve a careful consideration of both tax and estate planning goals, paying careful attention to cost basis impact with regard to highly appreciated assets.
Income Tax Deduction for Charitable Gifts
If you itemize deductions on your income tax return, you can generally deduct your gifts to qualified 501(c)(3) charities. These include qualifying public charities, private foundations, religious organizations, and other nonprofit entities.
You would typically choose to itemize if your total qualifying deductions exceed the available standard deduction.
2019 Standard Deductions (IRS)
Filing Status Amount
Married filing jointly $24,400
Head of household $18,350
The amount of your deduction for gifts to qualified charities will be limited to certain percentages of your adjusted gross income (AGI), typically 60% of AGI for cash gifts, 50% of AGI for certain noncash gifts, and 30% of AGI for long-term (held for more than one year) appreciated assets including stocks and property. Disallowed charitable deductions may generally be carried over and deducted over the next five years, subject to the income percentage limits in those years. You will want to be sure to retain proper documentation to substantiate the valuation of any noncash assets gifted charitably.
Gifting Appreciated Property
Charitable gifting of appreciated assets is a particularly valuable tool, as it enables the donor to realize the full market value of the gift without having to realize and pay tax on the capital gains. For this reason it can be more advantageous to gift appreciated assets charitably, as non-qualifying recipients of appreciated assets will receive a carryover basis for gifts made during life, and will then have to realize and pay capital gains tax upon sale of the assets.
Gifting from an IRA
You can also use your qualified charitable donation to meet all or part of your traditional IRA’s required minimum distribution (RMD) for the year, which will otherwise be taxed as ordinary income. Traditional IRA owners must start taking annual RMDs at age 70½ or face tax penalties. The charity must receive your donation by Dec 31st for you to apply it to this year’s tax return.
It is always wise to look at your marginal tax rate and how that may change from one year to the next when timing your charitable giving. The higher your marginal rate, the more valuable the deduction. Thus, whether you think your marginal tax rate is going up or down from one year to the next will help you decide if that gift should be made before December 31 of the current tax year or wait until after January 1 of the following year. It is also important to remember that for a gift to be included in the current tax year, the gift must be completed by December 31. Thus, a check must have cleared, title transferred, etc. or the gift is not complete and will fall into the following tax year.
Annual Exclusion Gifting
Under the federal unified estate and gift tax (IRS 2019 limits), every individual can make an annual gift of up to $15,000 to any single donee (recipient) with no estate or gift tax consequence or filing requirement. Thus, a couple trying to reduce a taxable estate and pass it to their children could together gift $30,000 to every child and grandchild under this annual gifting exclusion. This can be a useful planning tool for people facing taxable estates. In 2019, taxable estates in excess of $11.4 million ($22.8 million for married couples) will pay a 40% estate and gift tax on amounts (not given to qualifying charities) in excess of those limits.
It may be most beneficial to gift cash for annual exclusion gifting rather than an appreciated asset, because a noncash gift made during the donor’s life is transferred with a carryover basis (the basis received by the donee is the same as the donor’s). As mentioned above, this means that the donee would have to realize and pay any applicable capital gains tax upon sale of the asset. Appreciated assets that are included in the donor’s gross estate and passed at death will typically receive a step-up in basis, so that capital gain will never by realized. The donee in that scenario receives the asset with a basis equal to the market value at the date of death. While it still may make sense to gift appreciated assets during life, as a part of larger estate tax planning strategies, it is always important to consider basis issues when gifting.
Your First Business Private Wealth team can help you evaluate how to best make your year-end gifts, charitable and otherwise, in a manner that furthers your goals while minimizing tax consequences. Let us know today how we can help you.
The tax information provided herein is general and educational in nature, and should not be construed as legal or tax advice. First Business Trust & Investments does not provide legal or tax advice. Content provided relates to taxation at the federal level only. Charitable deductions at the federal level are available only if you itemize deductions. Rules and regulations regarding tax deductions for charitable giving vary at the state level, and laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of the information provided. As a result, First Business Trust & Investments cannot guarantee that such information is accurate, complete, or timely. Tax laws and regulations are complex and subject to change, and changes in them may have a material impact on pre- and/or after-tax results. First Business Trust & Investments makes no warranties with regard to such information or results obtained by its use. First Business Trust & Investments disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Always consult an attorney or tax professional regarding your specific legal or tax situation.