‘Tis the season of giving.
Whether it is a pair of socks to your Uncle Billy or a donation to your favorite charity, December is a big month for making gifts.
When it comes to making monetary gifts (Whether to a loved one or a charity), there can be preferable ways to give.
Although, if you are looking to give socks as a gift, Bombas makes a great product and donates a pair of socks for each purchased to homeless shelters. Learn more HERE1
Okay, back to the monetary type gifts.
For the sake of this blog, there are two basic ways to give someone or a charity a gift. Either by writing a check (or using a credit card or a VENMO type system) or by giving an appreciated asset.
An appreciated asset is something you bought that has gone up in value.
If we use a stock for example, let’s say twenty years ago you bought 100 shares of XYZ for $10 a share. XYZ is now selling for $100 a share.2
Your initial investment of $1,000 is now worth $10,000. That is a long term capital gain of $9,000 ($10,000 - $1,000 = $9,000)
If you sold those shares, you could be subject to long term capital gains taxes on the $9,000 gain. If you were in the 20% capital gains bracket, that would cost you $1,800 in taxes plus a potential additional 3.8% tax in certain tax brackets.
What if instead, you gave those 100 shares to your daughter or your favorite charity or place of worship?
If done correctly, you would pay no tax and receive a tax deduction (If giving to a qualified charity)
The qualified charity could sell the stock and pay no taxes at all and you receive a tax deduction of $10,000.. It’s a win-win.
If you gift those same shares to your daughter, there would be no taxable event and nothing to report. (If one is gifting an asset or cash to a non-charity that exceeds $16,000 in 2022 or $17,000 in 2023, one is required to file an IRS Form 709). Bear in mind, if your daughter (unlike the charity) sells those shares, they would be subject to taxes based on their tax rate.
Married, and want to gift more than $16,000 before year end to your daughter and her new spouse? You and your spouse can actually gift each of them $16,000 totaling $64,000 without having to fill out the 709 form.
Got a big bonus this year or saw your overall income jump up a lot? If you regularly give to charities (Or are thinking of establishing a gifting program) consider funding a Donor Advised Fund (DAF). These vehicles allow you to make a large gift in one year, take the tax deduction but then give to one or more charities as you see fit.
Let’s say you normally give your place of worship $5,000 a year and would like to continue doing so. You could take some of that bonus money after taxes ($50,000 for example) and put it in a DAF and then each year give $5,000 to the charity for the next 10 years. The money can be invested while in the Donor Advised Fund and can stay there for years before gifting. Once money goes into a DAF, it can’t be taken back however, you aren't required to give to any one particular charity.
Those of you who have been taking Required Minimum Distributions from your traditional IRA know that these distributions are taxed as ordinary income.
By utilizing a QCD or Qualified Charitable Distributions you don’t get a tax deduction however, the amount gifted (Up to 100k a year) is not added to your income.
Lastly, I advise checking with your CPA when doing any gifting as there are certain rules that apply whether one is taking the standard deduction or itemizing and figuring out if a DAF, QCD, or other method is best.
Any questions, we are here to help.
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All the best.
Rick Fingerman, CFP®, CDFA™, CCPS®
1We have no affiliation with Bombas. We just like what they are doing
2XYZ is a hypothetical investment and is not a recommendation
Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page