The holiday season is here, and that might put you in the mood to donate to a charity or bestow gifts or assets to loved ones. Even though the act of giving is the ultimate reward, don’t overlook the tax rules designed to encourage charitable giving.
Donating to charities
In the past, taking the standard tax deduction meant losing out completely on possible deductions for charitable gift-giving. Under a temporary rule in effect for 2020 and 2021, taxpayers can claim a limited charitable deduction in addition to the standard deduction on their personal income tax returns. The deduction is for cash donations to public charities only and is limited to $300 for single filers or $600 for a married couple filing jointly.
What if you want to give gifts of investments to your favorite charities? There are a couple of points to consider.
First, don’t give away investments in taxable brokerage accounts that are worth less than what you paid for them. Instead, sell the shares and claim the resulting capital loss on your tax return. Then give the cash proceeds from the sale to charity.
The second point applies to securities that have appreciated in value — these should be donated directly to charity. That’s because if you itemize, donations of publicly traded shares owned for more than a year result in charitable deductions equal to the full current market value of the shares at the time the gift is made. In addition, if you donate appreciated stock, you avoid the capital gains tax on those shares. Meanwhile, the tax-exempt charity can sell the donated shares without owing federal income tax. Keep in mind that your charitable deduction for donating appreciated stock will be limited to 30% of your adjusted gross income (20% if given to a private foundation).
Donating from your IRA
IRA owners and beneficiaries who have reached age 70½ are allowed to make cash donations of up to $100,000 a year to qualified charities directly out of their IRAs. You don’t owe income tax on these qualified charitable distributions (QCDs), but you also don’t receive an itemized charitable contribution deduction. (Get in touch with your KraftCPAs tax advisor if you’re interested in this type of gift.)
Gifting assets to family and other loved ones
The principles for tax-smart gifts to charities also apply to gifts to relatives, meaning that it is more advantageous to sell investments that are now worth less than you paid for them and then claim the resulting capital losses on your personal income tax return, rather than gifting the stock directly to loved ones. You can give the cash proceeds from the sale to your loved ones instead.
Likewise, you should give appreciated stock directly to those to whom you want to give gifts. You will avoid paying tax on the unrealized gain, and if they sell the shares, they’ll pay a lower tax rate than you would if they’re in a lower tax bracket.
In 2021, the amount you can give to one person without gift tax implications is $15,000 per recipient. The annual gift exclusion is available to each taxpayer; so, if you’re married and make a joint gift with your spouse, the exclusion amount is doubled to $30,000 per recipient for 2021.
Make gifts wisely
Whether you give to charity or loved ones this holiday season — or both — it’s important to understand the tax implications. For answers to your specific questions, reach out to me or any member of the KraftCPAs tax team.
© 2021 Kraft CPAs PLLC