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5 Things to Remember When Making a Financial Gift

As 2018 comes to a close, thoughts naturally turn toward sharing our good fortune with others. For example, do you plan to give your grandkids a lump sum of cash, or your kids title to the family ski cabin? Or are you considering transferring a 529 college plan or individual retirement account to a family member or charitable organization? Provisions of the Tax Cut and Jobs Act may make things more complicated this year, especially if you are no longer itemizing due to the $10,000 cap on state and local taxes, but may also allow you to give more.

So, it’s important to not only give generously — but also give in the approved way. Here is some guidance to keep in mind as you consider end-of-the-year gifts.

Consider charitable bundling. You are permitted to consolidate several years’ worth of payments into a single tax filing via a charitable vehicle, such as a foundation or donor-advised fund, allowing immediate itemization and deduction.

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The amount of the gift can be added to the $10,000 maximum state and local tax deduction. So for example, a $20,000 gift would allow a $30,000 deduction, or $6,000 more than the current standard deduction of $24,000. A donor who can’t afford to make that commitment every year could then instruct the fund on how to disburse the funds over the next several years: say, $5,000 per year for four years.

You could then repeat the process in a later year to deduct any sum in excess of the $24,000.

Higher tax-free cash limits: If you are feeling cash-generous this year, the TCJA will now allow an additional thousand dollars per gift, up to $15,000, the first raise since 2013. You’ll pay tax on the amount of the gift after subtracting the exemption, for example $5,000 on a $20,000 gift.

The gift, estate and generation-skipping tax exemption has been increased from $5 million to $10 million. Adjusted for inflation, this year’s exemption will be approximately $11,180,000 (or about $22,360,000 for a married couple), to increase gradually over time before sunsetting in 2025. Sums in excess of that amount are subject to an unchanged 40 percent tax rate. State estate tax laws are usually significantly less generous, however. And keep in mind this will only apply to taxpayers who have never previously deducted a gift of this size.

Consider non-cash gifts: When making charitable donations, particularly securities, consider the multiplier effect: Shares worth several thousand dollars today may be worth tens of thousands long after the gift is made, and experienced managers will know when to sell. From the donor’s perspective, you may deduct the full value of the stock on the day it was transferred, regardless of whether it may have plummeted (or soared, for that matter) the next day.

Donation of real property is somewhat more complicated, as protections are in place to ensure against overvaluation. Consult with a real estate attorney about how to ensure your valuation is fair and will not be challenged. Mortgaged properties can create headaches for charitable organizations, and they generally try to avoid them.

[See: 9 Stocks That Dominate Your 401(k).]

If you want to give away that ski cabin or beach house, or any other type of property, to an individual, the maximum exclusion amount above applies: $15,000, or $30,000 for a married couple who jointly own the property. Remember that the limit applies to each gift, meaning that you can give as many gifts — cash or property — to as many different people as you like without reaching a cumulative cap.

Use caution on tax-free funds: Gifting an untapped IRA to a charity as part of your estate allows you to split the proceeds among several charities, all of whom can get the non-taxable benefit, as opposed to individual beneficiaries who are subject to the full federal and local state taxes, if applicable. Those over 70 1/2, who are subject to minimum distribution requirements, can donate up to $100,000 to charity without incurring taxes, but only if the funds go directly to the charity and you have not even temporarily realized personal gain. Consult a professional before making this choice.

Under IRS guidelines, gifts that are not taxable include those given to a spouse (limits apply to a spouse who is not a US citizen), to a political organization for its use, or tuition or medical payments for another person. So, rather than, say, a $25,000 cash gift to a significant person in your life, consider paying a tuition or medical bill for a similar amount. Any cash left over would then fall below the gift limit.

Instead of paying the tuition directly, you can place up to $75,000 ($150,000 per married couple) in a 529 tax-exempt saving account on behalf of a single beneficiary without paying a gift tax. Keep in mind these funds can only be used for qualified education expenses or they will become taxable. Liquidating a 529 account for a non-beneficiary would make the funds above the principal investment fully taxable. Also, keep in mind that tuition gifts could impact the student’s financial aid eligibility.

Choose Charities Carefully: There has been rapid growth in investment philanthropy — opportunities to “plant a seed” that can reap benefits over many years — for example, helping fund startups or nongovernmental organizations that create jobs and infrastructure in underdeveloped regions. This is one benefit of advisor-guided funds, which identify many such opportunities. If you are donating directly, make sure the organization runs a tight ship and keeps overhead low.

Last year, nonprofit watchdogs Charity Navigator and Guidestar began collaborating to share information about transparency on more than 13,000 organizations, making it much easier to root out shady causes and identify the best. You can also check with the charities bureau of your state attorney general’s office to see if a particular group has had any issues or investigations.

[See: 11 of the Most Interesting New ETFs to Buy.]

Giving feels good, so in this season of generosity enjoy all the benefits you can give to others, with the peace of mind of doing so as efficiently as possible.

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5 Things to Remember When Making a Financial Gift originally appeared on usnews.com



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