By Jeffrey R. Wolfe, Senior Vice President and Manager, Wealth Planning Strategies
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Many love the feeling of a satisfying gift to a loved one. 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 keep possible tax dollars away from the government. Under federal law, every person can gift up to $15,000 per person per year. Married couples can combine their gift giving ability and make up to $30,000 in gifts. 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 $15,000 a year for 20 years, and your beneficiary receives a 5% rate of return on those gifted dollars, your beneficiary would have nearly $496,000, 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, the beneficiary 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.
For 2021, there are also some special rules for charitable giving. If you itemize, for this year only, due to the CARES Act, you can deduct up to 100% of your adjusted gross income for cash gifts to qualified charities (typically the limit is 60% of your AGI). However, if you gift assets, traditional rules apply, and the deduction is limited to 30% of your adjusted gross income.
Another change from the CARES Act is that even those who do not itemize may take a charitable deduction this year. Specifically, standard deduction filers may take an “above the line” deduction of $300 for contributions to public charities. Married filers are allowed a $600 deduction. With the deduction being “above the line” this means you deduct this amount before calculating your AGI, an impactful deduction.
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.
Benjamin F. Edwards & Co. does not provide legal or tax advice, therefore it is also important to consult with your legal and tax professionals for additional guidance tailored to your specific situation.