Share Wealth and Save on Taxes!
- jmathieu19
- Dec 4, 2024
- 4 min read
The holiday season is a time for giving and many of our clients wish to share their wealth. There are many efficient strategies that can guide you to give sensibly. Here are a few common options that can help with gifting wealth or assets for the holidays, while keeping tax implications in mind. ~Jean
1. Annual Gift Exclusion for Gifting Wealth
One of the simplest and most direct ways to share wealth is through the IRS annual gift tax exclusion. For 2024, the IRS allows individuals to give up to $18,000 per recipient without triggering gift taxes or the need to file a gift tax return. Married couples can combine their exclusions to gift $36,000 per recipient.
The annual gift exclusion is also a smart way to minimize estate taxes because you can take out up to the gift exclusion limit every year, which cuts on your tax liability.
2. 529 College Savings Plan Contributions
For those looking to support a loved one’s education, contributing to a 529 college savings plan is another tax-efficient option. While contributions are not federally tax-deductible, the earnings in these accounts grow tax-free, and withdrawals used for qualified educational expenses are also tax-free.
Additionally, contributions to a 529 plan are considered gifts for tax purposes. A unique feature of 529 plans is the ability to “front-load” five years’ worth of contributions. For example, an individual can contribute up to $90,000 in a single year without incurring gift taxes, provided no other gifts are made to that beneficiary over the following four years.
3. Charitable Contributions
Donating to charitable organizations is another way to share wealth that may provide tax benefits. Contributions to qualified charities are generally tax-deductible for those who itemize deductions, and in some cases, donating appreciated assets like stocks may offer additional tax savings. By donating appreciated assets, the donor can avoid paying capital gains taxes on the appreciation, while the charity receives the full value of the asset.
Some may also consider setting up a donor-advised fund (DAF), which allows for an immediate tax deduction while giving the donor time to decide on specific charitable recipients.
4. Gifting Wealth through Appreciated Stock
Gifting appreciated stock can be a tax-efficient way to transfer wealth to family members, particularly those in lower tax brackets. When appreciated stock is gifted, the recipient assumes the donor’s cost basis and holding period. If the recipient is in a lower income tax bracket, they may be able to sell the stock and pay less in capital gains taxes, or potentially none if they fall within the 0% capital gains bracket.
5. Direct Payments for Medical or Educational Expenses
Another strategy for tax-free gifting is paying for someone’s medical or educational expenses directly. Payments made to medical providers or educational institutions on behalf of another individual do not count toward the annual gift exclusion and are not subject to gift taxes. This approach allows people to provide meaningful assistance without reducing their available gift tax exclusion.
6. Gifting Wealth by Establishing a Family Trust
For those considering longer-term planning, creating a trust can offer a way to distribute wealth over time while providing potential tax advantages. Depending on how the trust is structured, it may allow assets to grow outside of the donor’s estate and, in some cases, offer tax benefits to both the grantor and the beneficiaries. A common vehicle for this is an irrevocable trust, which removes assets from the donor’s taxable estate.
Conclusion
During the season of giving, there are many tax-efficient ways to share wealth and uplift others. With a little planning, you can give to a charity, support a child’s education, help a loved one in need, or establish a legacy for your family, all while managing your tax burden.
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