By: Kate Hennessy, CFP®
Sir Winston Churchill once said, “We make a living by what we get, we make a life by what we give.” Giving can come in different forms and sizes and at year end it is the most prevalent, as people take stock in what they have and reflect on how grateful they are. This year has been particularly challenging for many people so many charities will be especially grateful for the donations they receive.
As we approach the end of the year, we want to share three gift giving ideas of how to give smartly to reduce your taxable income and share any good fortune with others.
1. Qualified Charitable Distribution (QCD) – a QCD allows Traditional Individual Retirement Account (IRA) owners to deduct their required minimum distribution (RMD) on their tax return if the RMD is donated to a charity. A RMD is the minimum amount an individual must withdraw from an IRA each year. The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 pushed back the age at which participants need to take RMDs. Normally individuals begin taking their RMDs at age 72, or 70 ½ if they reached 70 ½ before January 1, 2020. A RMD is considered taxable income but if you donate it to charity then you can deduct the RMD amount in order to lower your taxable income. Reducing your taxable income by gifting your RMD to a charity has further benefits because at age 70 you also need to begin claiming Social Security benefits. Depending on your taxable income level, your Social Security benefits may be taxed. For example, 85% of your Social Security benefits are taxable If your taxable income is above $34,000 (individual) or $44,000 (couple). Therefore, gifting your RMD to a charity can help lower your taxable income and reduce the possibility of your Social Security benefits being taxed as well.
2. Education – the gift of education is priceless. As children around the world are making their holiday lists this year, consider making a gift to their 529 plan as well. A 529 plan is a college savings plan that is used to save for K-12 and college expenses. Gifting to 529 plans is a great strategy for grandparents to deploy. This year you can gift up to $15,000 to each beneficiary and still qualify for the annual gift tax exclusion. Gifting allows you to reduce your taxable estate too and is a great forward planning tool to minimize your estate taxes in the future. Your gift will grow tax-free in the 529 plan, and distributions from the plan will not be taxed as long as they are used to pay for qualified education expenses. Check with your state’s 529 plan as some states offer an income tax credit if you participate in their 529 plan.
3. Appreciated Stock - Another popular gifting strategy is donating appreciated assets to charities. Most of us have benefited from a strong stock market and may own a mutual fund or stock that has an unrealized gain (profit that exists on paper from an investment that has yet to be sold in return for cash). As a general rule, individuals do not pay tax on their investment until the gain is realized (the investment is sold in return for cash). If the investment is owned for less than a year, then the gain is taxed at a short-term capital gains rate. If the investment is held for more than one year, then the gain is taxed at a long-term capital gains rate. The IRS encourages investors to hold their investments as long as possible and as a result taxes long-term investments at a substantially reduced rate compared to short term investments. When a donor makes a gift of an appreciated asset to a charitable organization, the donor can avoid recognizing a long-term capital gain and also receive a tax deduction. Charitable organizations make donating appreciated assets relatively easy - there is minimal paperwork and the benefits to both the donor and organization are valuable.
Everyone is at a different stage in their life. Some of our clients have already moved through the accumulation phase and have just begun the distribution phase. Other clients may have benefited from a strong stock market and therefore may want to trim a holding via a gift to charity. Whatever your situation, we hope you are able to reflect on your good fortune and donate to a charitable organization that is meaningful to you. Please reach out to us if you are interested in learning more about charitable gifting strategies and enjoy the holiday season.