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Incorporate Tax Planning Into Your Year-End Giving Strategy

As the end of the year approaches, many of us start thinking about giving as a way to celebrate the season and share our many blessings. Whether it is to a family member, a favorite cause, or an umbrella-style charitable organization, careful planning can maximize the value of your gifts for recipients while generating valuable tax benefits for you. 

Gifts to family and others

Here is some good news for those hoping to transfer wealth through holiday gifting: The gift tax exclusion rises to $16,000 for tax year 2022. This exclusion caps the value of cash or non-cash assets that taxpayers may pass to family members or others without filing a gift tax return. 

The exclusion is per person; both you and your spouse can give amounts up to the limit to the same giftee, effectively doubling the amount of the exclusion for married couples who file taxes jointly. You can also make tax-free gifts to as many folks as you like; gift tax filing requirements only kick in when the value of your gift to a single recipient exceeds the exclusion threshold.  

For many people, the winter holiday season is the prime window for making philanthropic gifts as well as personal ones. When the recipient is a qualified nonprofit organization, gift taxes do not apply. 

Setting the stage for charitable giving in 2022

This year, unlike 2020 and 2021, there is no above-the-line tax deduction available for charitable giving. Donors will have to itemize deductions in order to realize tax benefits. Cash gifts are deductible up to 60% of a taxpayer’s adjusted gross income (AGI) in 2022 while non-cash assets held for longer than a year before gifting can be claimed up to 30% of AGI.

Since the passage of the TCJA, which greatly expanded the standard deduction, donors have been advised to consider compressing charitable gifts into a single tax year to harvest maximum tax value. You can carry forward up to five years any amount that exceeds the annual AGI limits.

Tax planning for charitable giving is a complex subject that demands expert advice built around an individual’s unique tax and financial situation. However, some broadly applicable strategies often yield positive results when executed appropriately.

Qualified charitable deductions help donors and recipients

Making a qualified charitable deduction (QCD) can be a wonderful way to reap financial benefits while supporting your favorite organizations. QCDs allow certain account holders to donate their required minimum distribution (RMD) to a charity or other eligible 501(c)(3) organization. 

Since the RMD is mandatory, you’re going to be taking that money out of the account even if you don’t need it to help meet your living expenses. Taken as a QCD, however, the withdrawal is not treated as income taxable to you. 

That means it can’t nudge you into a higher income bracket, which could trigger phaseouts of other tax deductions or make more of your Social Security income taxable. And, by lowering the balance in the account, your QCD reduces the amount of future RMDs, thereby lessening the tax liability associated with RMD withdrawals from that account in the years to come.

A QCD can also allow you to make larger gifts, as the amount of your QCD does not count toward AGI limits on deductible donations—but it is not tax deductible, either.

Limitations on QCDs

To qualify as a QCD, the donation must go directly from the account custodian to the receiving organization and be completed by December 31st.  

Donors must be at least 70 ½ years old to give through a QCD. Once you meet the age requirement, single filers can donate up to $100,000 in total each year while joint filers can make total QCDs of up to $200,000. 

The QCD can come from a single account or any combination of QCD-eligible taxable retirement accounts: 

  • Traditional IRAs
  • Inherited IRAs (either traditional or Roth)
  • Inactive SEPs and SIMPLE IRAs

Though your QCD can exceed the amount of your RMD, you won’t be able to carry forward excess RMD and apply it to RMDs for future years. And, unlike other charitable donations, you cannot receive non-tax benefits from your QCD; auction purchases, event tickets, discounted admission, and all other types of incentives and donor rewards are disallowed for QCDs.

Importantly, IRS rules also forbid taxpayers from making a QCD to a donor advised fund or a private foundation. If you’re considering a QCD, be sure to confirm that the intended recipient is qualified to accept QCDs before arranging your donation. 

A QCD can be a versatile tool that benefits you and your favorite organization, but it is not right in every situation. Talk with your tax advisor before making this kind of gift. You can learn more about tax-savvy giving strategies by contacting Mauldin & Jenkins.