1. Put stocks in stockings
As a complement to more thoughtful (and fun) gifts, consider giving investments to your family. This is a great way to help introduce young children to investing. In addition, giving appreciated stocks allows you to give more than you could after realizing capital gains taxes.
For the Scrooges among us, giving appreciated stocks can help to trim concentrated positions and offload unrealized capital gains taxes (nothing says “I love you” quite like giving your kids the obligation to someday pay taxes to the IRS!). If you want to gift appreciated securities without also passing along the tax obligation, you may prefer to use a grantor trust (in which case you will remain responsible for the trust's income taxes). When structured correctly, either strategy can allow you to reduce your future estate tax liability. You and your spouse can each give up to USD 16,000 per recipient in 2022 (which will increase to USD 17,000 in 2023) before tapping into your lifetime gift and estate tax exemption limit.
2. Give to your future self
It's not too late to make sure that you've reached the annual limit on your retirement accounts and Health Savings Accounts! To make sure that you have taken advantage of contributions that you and your spouse may be eligible for, please check out our Savings waterfall worksheet.
3. “Brady bunch” your donations
To retain the tax benefits of charitable gifting, you may want to “Brady bunch” several years of gifting into a single year to make itemizing your taxes worthwhile. After all, the 2022 standard deduction is USD 12,950 for single filers and USD 25,900 for married couples filing jointly, and many itemized deductions were eliminated in the 2017 Tax Cuts and Jobs Act, which is why nearly nine out of 10 taxpayers now file using the standard deduction.
If you'd like to make a very large donation this year in order to reduce your taxes, but you would like to stretch your charitable donations over more years rather than make a big one-time gift, you may want to consider using a Donor Advised Fund (DAF) or a private foundation. These vehicles can allow your family to make a charitable contribution —including appreciated securities—and keep these funds growing before they are eventually granted or donated.
As you consider itemizing your charitable donations, bear in mind that cash contributions have a higher limit on deductions than donations of appreciated stocks or funds. In the former instance, you may be able to get credit card points, and in the latter instance you can benefit from avoiding capital gains taxes. Please ask your financial advisor for a copy of "Charitable giving: the rules of the road," which discusses these considerations in detail.
4. Use QCDs to donate efficiently
Qualified charitable distributions (QCDs) are another way that you can give to charities on a tax-efficient basis. If you need to make a Required Minimum Distribution from your IRA (generally limited to traditional and inherited traditional IRAs) and you are at least age 70½, you and your spouse may each donate up to USD 100,000 from your respective IRAs to one or more charitable organizations. QCDs will count toward your RMD, and it won't be subject to federal income tax, but this gift must be made directly from an IRA to the charitable organization, and it must be completed by yearend.
5. Give while you live
In 2022, an individual may also make transfers of up to USD 12.06 million either during their lifetime or at death without incurring any gift or estate tax on those transfers. For the 2023 tax year, this lifetime exemption is set to increase to USD 12.92 million due to inflation. Importantly, however, the lifetime exemption will revert to 2011’s original USD 5 million base amount (adjusted for inflation) on 1 January 2026, unless Congress takes action. Especially with a divided government after the 2022 election, it seems highly unlikely that a more favorable estate tax will be politically viable.
If there is a chance that your family will be subject to the estate tax, there are three reasons to consider making lifetime gifting a priority:
- There is a window of opportunity for taking advantage of currently favorable gift and estate tax provisions.
- The 2022 decline in asset prices may enhance the effectiveness of gift and estate planning strategies. By making a lifetime gift with assets that have decreased in value, the market rebound will occur outside your taxable estate, which can be extremely beneficial and tax-efficient.
- If you have already exceeded your lifetime gift and estate tax exemption, then making lifetime gifts can be far more tax-efficient than end-of-life gifts. Although the top marginal federal tax rate for estate and gift taxes are both 40%, there is one key difference between the two: The gift tax is “tax-exclusive”—applied only to the value of the asset being transferred, while the estate tax is “tax-inclusive,” based on the entire estate (including assets that are used to pay the estate tax).
This means that—when you make a gift to anyone other than a spouse or charity in excess of your lifetime and annual exemptions—you will need to pay taxes based on the amount of the taxable gift. By contrast, estate taxes are paid based on the value of your entire taxable estate. This sounds like a weird technicality, but it can have a meaningful impact on the value that you are able to give your family.
If you want to give USD 1 million during your lifetime, you need to set aside USD 400,000 for taxes (USD 1 million x 40%), so the total cost of that gift is USD 1.4 million. If you want your heirs to receive USD 1 million from your estate, on the other hand, you need to leave at least USD 1.66 million (the estate tax is USD 1.66 million x 40% = USD 0.66 million, leaving USD 1 million for your heirs).
Main contributors: Justin Waring, Ainsley Carbone, Jeff LeForge, Daniel J. Scansaroli, and Katie Williams
Read the original blog Give to others, not the IRS 10 November 2022.
This content is a product of the UBS Chief Investment Office.