Year-End Financial To-Do: Making Annual Gifts to Family and Charity

Dec 20, 2022

By Jeffrey R. Wolfe, Senior Vice President and Manager, Wealth Planning Strategies

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Many love the satisfying feeling of making a gift to a loved one or their favorite charity. For those that may face a potential federal or state estate tax, making annual gifts to loved ones can feel even better because it may save possible estate tax dollars. Under federal law, every person can gift up to $16,000 per person per year, with that number indexing to $17,000 in 2023. Married couples can combine their gift-giving ability and make up to $32,000 in gifts in 2022, $34,000 in 2023. That’s a substantial amount of wealth being transferred tax free, and if done over multiple years, the amount of assets transferred can be staggering. Consider that simply giving away $16,000 a year for 20 years, and your beneficiary receives a 5% rate of return on those gifted dollars, your beneficiary would have more than $529,000 – all of which would be out of your estate for estate tax purposes.

When determining what to gift, there may be opportunities to gift actual assets (shares of stock for example) in lieu of cash. For gifts of assets versus cash, it’s important to remember that when you give an asset you also give away your basis in that asset. Therefore, if the fair market value of the asset is close to your cost basis in that asset, now may be a good time to make the gift. Gifting assets with little or no gain may allow your beneficiary to sell that asset and utilize the proceeds with little or no income tax consequence.

On the other hand, you may consider gifting an appreciated asset in certain situations. For example, if the beneficiary were to sell the gifted asset, they would realize any corresponding tax liability. If your beneficiary is in a lower tax bracket, this could lower the ultimate amount of tax paid. Consider, though, that such a sale could put your beneficiary in a higher tax bracket overall. Moreover, if the beneficiary is your dependent child, the Kiddie Tax could come into play if an appreciated asset is sold causing the gain to be taxed at your tax rate. For any significant gifts, be sure to consult your tax professional on the potential income tax consequences for such gifts and resulting sales.

You can also make gifts to charity to help with taxes. If you itemize, you can deduct those gifts on your tax return. Typically, gifts of cash to a charity allow for a deduction up to 60% of your adjusted gross income, while gifts of assets (like stocks and bonds, for example) allow a deduction limited to 30% of your adjusted gross income. If your gift exceeds these limits, you can “carry forward” your charitable deduction to later tax years for up to five years.

Whether you are giving to individual beneficiaries or to charity, if you want to assure your gift will apply to this tax year, gifts must be completed by year end. It may take some time to complete the gift, especially if you are transferring stock or other non-cash assets. Start the giving process early to ensure that the transfer is made before the end of the year.

Please remember, Benjamin F. Edwards does not provide tax advice, so it is important to consult with your tax professional for guidance tailored to your specific situation.