For 2022, the annual gift tax exclusion has been increased to $16,000 per individual. For two partners, gift splitting would allow up to $32,000 ($16k/ donor). When we talk about the $16,000 this refers to the maximum amount a donor could gift to a single individual before using a portion of their lifetime gift exclusion of $12,060,000 (think estate taxes). The number of individuals to whom a donor may gift has no cap.
For the grandparents out there, college savings is a great way to get the little one ahead in life at a young age. This year a grandparent (or parent) can super-fund a 529 plan with $80,000 (5 years’ worth of gifting) if no other gifts are made to the same beneficiary over the next 5 years. Many grandparents can utilize this strategy as a portion of their estate plan. State 529 plans do have aggregate limits of dollars that can be in the plan, so this is something to watch out for. They range from $235,000 at the low end to $550,000 at the high end. Depending on where the plan is located, four grandparents may not be able to take full advantage of the super-funding strategy (4 x $80k= 320K) within the same state administered plan.
With the markets finishing the year near market highs, donating highly appreciated stock positions from after-tax accounts can be a great method to use. By donating appreciated stock, the donor is also able to take a deduction from their adjusted gross income (AGI) for tax purposes. Note that this only occurs if they itemize their deductions rather than taking the standard deduction.
For assets held less than one year (think short-term capital gains treatment) one can deduct up to 50% of their AGI limited to the cost basis of the donated security.
For example, a couple has an AGI this year of $150,000. They had purchased stock 10 months ago for $10,000 (basis) and today it is worth $30,000 (Fair Market Value, FMV). They would only be able to deduct the basis of the stock ($10,000 against their AGI). In this situation the deduction would be limited and may not make the most sense. The max this couple could deduct using this method would be $75,000 if they are gifting assets that have been held less than one year (50% of their AGI).
For assets held greater than one year (think long-term capital gains treatment) one can deduct up to 30% of AGI considering the Fair Market Value of the stock.
It’s the same example as above, but the stock has now been held for 13 months. The couple would be able to take the full $30,000 FMV of the donated stock against their AGI. Their maximum annual deduction with this rule would be $45,000 in this case ($150,000 x .3= $45,000)
If you happen to donate a security that has a cost basis or fair market value greater than the 50% or 30% AGI limits, the IRS does allow for the remaining donation to be carried forward for future deductions. It’s always safe to discuss with a CPA if this is going to be the case.
These rules mentioned above apply to public charities; private charities have smaller deduction limits.
The final portion I would like to discuss is a term called “Qualified Charitable Distribution” or QCD for short. These are distributions made to a 501(c)(3) directly from Traditional or Inherited IRAs once an individual must take Required Minimum Distributions (RMDs) from their retirement accounts. This is a great way for a charitably inclined investor to donate and be tax conscious.
If an investor needs to take $50,000 out of retirement accounts this year for required minimum distributions (RMD) and they plan to donate $10,000 to their charity of choice, the investor could have $10,000 of the RMD sent directly to the charity. This $10,000 distribution would not be taxable to the investor and would lower the taxable portion of their RMD to $40,000 for the year. The max an investor can allocate to a QCD is up to $100,000 of the total RMD.
Keep in mind distributions from 401Ks, 403Bs, SEP and SIMPLE IRAs are not eligible for a QCD.
The strategies mentioned above have nuances and it’s imperative that we take a team-based approach to ensure your goals are being met. We look forward to helping you impact the lives of others in 2022!