With the holiday season here and year-end quickly approaching, many plan to donate to charity or gift money or other assets to their family members. What are the tax implications of this generosity?
Donating to charity
Before 2022, the IRS temporarily allowed a deduction of up to $300 per person without having to itemize, but unfortunately, that is no longer the case. To receive a tax benefit for charitable donations, the total of all your itemized deductions will have to be greater than the standard deduction (i.e., $12,950 for single and $25,900 for married joint filers).
Reaching this threshold can be difficult. One strategy can be to batch a couple of years of donations into one year. Also, donating cash may not be the best option. Instead, securities that have increased in value can be donated. If the security was held over a year, the value of the donation is the current market value, not the amount originally paid. Even if the itemized deductions are less than the standard deduction, with a stock gift, you can avoid the capital gain that would have been triggered upon selling the security and donating the cash.
Another strategy for taxpayers who own an IRA and are required to take a required minimum distribution (RMD) is to directly transfer the funds from the IRA to a charity of your choice. This transfer is called a Qualified Charitable Distribution (QCD). This transfer counts towards the required minimum distribution for the tax year, and the RMD is not taxable. Utilizing this QCD strategy is like getting a 100% tax deduction.
Giving to loved ones (non-charitable gifts)
For 2022, the maximum that can be gifted without gift tax implications is $16,000 to each recipient. This annual exclusion is per taxpayer. Married couples can make a joint gift, doubling the exclusion to $32,000. If gifting an investment, similar to donating to charity, it is advantageous to gift assets that have increased in value. For an investment that decreased in value, it is better to instead sell and claim the capital loss, then gift or donate the cash.
Tax-smart donations and gifts
Whether giving to charity or loved ones (or both) this holiday season, it’s important to understand the tax consequences. Your tax professionals at Wegner CPAs are happy to assist with questions and planning to maximize the tax benefits of donations and minimize any tax impact of gifts.