As the year draws to a close, many of us are scurrying to make last minute gifts to family and charity. Here are some commonly asked questions:
How much can I gift to an individual?
In 2017, you can gift up to $14,000, per person, to as many individuals as you wish. We refer to the $14,000 as the “annual exclusion amount”. The recipient does not have to be related to you.
Here is an example: if you have five children, you can gift $14,000 to each of them, to each of their spouses, and to each of their children. Your spouse may also make $14,000 gifts to the same person(s). And, if your spouse does not have funds readily available, he or she can join in your gift so that the two of you can gift a total of $28,000 to each recipient. If you choose to make a gift, keep a copy of the check for your records.
Is a gift taxable?
A gift is not taxable income to the recipient. However, if you make cumulative gifts of more than $14,000 to any one person during the year, you will have to file a federal gift tax return. Each of us has a $5.49 million credit for the federal estate and gift taxes, which are a unified tax. This means that if you make a gift of more than $14,000, the excess will simply reduce your $5.49 million credit dollar-for-dollar. You will not actually pay any tax until you exhaust the $5.49 million credit.
What about paying tuition for my children or grandchildren?
If you pay college tuition for an individual, it does not count toward your $14,000 annual exclusion, so long as you make the payment directly to the educational institution. This means you could pay your grandchild’s tuition and also give your grandchild an additional $14,000 gift without any gift tax liability. This rule applies only to tuition – not to room and board or other expenses.
What about if I gift money to a 529 educational savings plan?
A gift to a 529 educational savings plan is considered a gift for gift tax purposes. However, you can deduct up to $5,000 per year ($10,000 for a married couple) on your Michigan income tax return. And, here is an interesting option: you may gift up to five year’s worth of your annual exclusion ($14,000 x 5 = $70,000) this year, and then spread the gift over the next five years for gift tax purposes. Why would you want to do that? The reasons are two-fold: (1) it gets the appreciation on these monies out of your taxable estate and (2) it puts the money to work for the beneficiary immediately.
How about paying medical expenses?
You may also pay medical expenses for another individual without any gift implications if you pay the expenses directly to the provider of the medical service. So, like education expense, you may pay someone’s medical expenses and still make a gift of up to $14,000 to that person.
How about giving to charity?
In this season of giving, don’t forget there are many who are less fortunate than you. There are many options available to give to charity, and there is no limit on the amount you can give. Here are some common options:
- Cash: You may make a gift by cash or check. Generally, we recommend using a check, rather than cash, so you have a record of the gift for tax purposes, but sometimes – for example, when you give to the Salvation Army bell ringer outside a store – cash is the only practical gift. When you give cash, be sure to write down the amount, the date, and the entity to which you gave so that you have a contemporaneous notation for your tax records. Some charities will accept gifts by credit card or debit card, particularly if you are giving a recurring gift.
- Appreciated assets: Consider using long-term appreciated assets, such as stock and real estate. You will get credit for the full value of the gift, but you will not realize any taxable capital gains. Here is how it works: Let’s say you purchased stock for $25 per share. It is now worth $40 per share. If you sell it, you will realize capital gains of $15 per share which will be taxable to you. However, if you gift it to a charity, you will get a charitable deduction worth the fair market value – $40 per share – and you will not realize any taxable capital gains. To get this advantage, you must transfer the asset to the charity and let the charity liquidate it; you cannot sell it and transfer the proceeds to the charity if you want to avoid capital gains tax.
- IRAs: If you are at least 70 ½ years old and own a traditional IRA, you may donate up to $100,000 from your IRA without paying any tax on the funds. To qualify, the funds must be distributed directly from the IRA trustee to the charity. You cannot cash it out and then distribute the money to the charity yourself. Although you will not get a charitable deduction for the gift, there are a number of tax advantages:
First, the distribution counts toward your annual minimum required distribution. This is helpful if you do not want to raise your income tax bracket; increase the portion of your Social Security that is subject to tax; or incur a Medicare surcharge due to a higher income.
Second, the distribution will not be included in your adjusted gross income for income tax purposes. - Beneficiary Designations: If you plan to make a gift to a charity at your death, you may name the charity as the direct beneficiary of all or any percentage of your life insurance, IRA, or other retirement plan. Let’s say you want to give the charity $10,000 at your death. Consider doing it through a traditional IRA or other retirement plan. If passing to your heirs, such plans are subject to income tax and, if your estate is large enough, federal estate tax. A gift to a charity is not subject to these taxes. Your $10,000 gift to the charity may only “cost” your heirs about $2,000-$3,000!
You may also name a charity as a beneficiary of all or any part of a life insurance policy.
You may also name a charity as a beneficiary in your will or trust. Such gifts reduce the value of your taxable estate dollar for dollar. This is especially advantageous if your estate exceeds the federal estate tax exemption, because excess amounts not passing to charity are subject to a 40% estate tax. If you choose to name a charity in your will or trust, you can specify the purpose of your gift, or you can leave a general gift to be applied to areas of greatest need. - Endowment Funds: You may choose to make a perpetual gift through an endowment fund. An endowment fund in one in which the principal remains invested perpetually, while the income earned on the principal is distributed to the charity for its use. The fund can be established to benefit a specific agency, a specific field of interest, or for any charitable purpose you choose. If you make a gift to the endowment fund, your dollars will still be working to provide for the charity 100, 200, 300 years from now. What a legacy!
As an added bonus, a gift to an endowment fund at a community foundation not only gives you a charitable deduction on your federal income tax return, but also certain state income tax credits. You may give to an existing fund or set up your own fund. At our local community foundation, the Capital Region Community Foundation, you can set up a perpetual endowment for as little as $10,000.
If you would like more information on gifting, please call us.