Year-End Gifting Opportunities

Client Centered

With year-end rapidly approaching and the holiday season drawing near, the fast-paced routine of everyday life can easily consume our attention. However, amid the hustle and bustle, it is imperative not to lose sight of valuable planning opportunities which have the potential to yield significant financial benefits. With that in mind, we crafted a year-end gifting checklist highlighting several timely planning considerations.


Manage Tax Bracket Variability

Individuals should consider how their current tax picture compares to prior years, as there may be “levers” which can be used to produce considerable tax savings.  In high-income years, individuals may wish to accelerate itemized deductions (most notably, charitable contributions) while deferring certain income items (such as the sale of a business, the sale of certain investments or stock option exercises). Charitably inclined taxpayers may wish to use a donor-advised fund to recognize a larger current-year deduction while making charitable grants at a future date and at a pace of their choosing. 

In low-income years, individuals may wish to defer itemized deductions (such as charitable contributions) while potentially accelerating certain income items (such as investment sales, stock option exercises, reconversions, etc.).

Charitably inclined individuals who are nearing retirement and who expect a significant drop in taxable income post-retirement might consider accelerating charitable donations (either directly to charity or to a donor-advised fund) prior to retirement to maximize itemized deductions while in a higher income tax bracket.

Donate Appreciated Securities, Not Cash

It is estimated that December donations account for nearly a quarter to a third of annual nonprofit revenue.  With many nonprofits soliciting year-end donations, many individuals opt for the convenience of writing a check or charging a credit card although another giving option may be financially preferable.

Individuals with long-term appreciated securities held in a taxable account should consider potentially gifting such securities to charity. Why? The charitable organization receives the same economic benefit as a cash donation, while the taxpayer receives a tax deduction for the full market value of the gift and, importantly, avoids paying capital gains taxes on the gifted security.

Gifting appreciated securities can also be beneficial as it provides a tax-efficient means to rebalance a portfolio by reducing exposure to a given asset class or to a concentrated stock position, without incurring capital gains.

Keep in mind that gifts of long-term appreciated securities to qualified public charities (including donor-advised funds) are limited to 30% of adjusted gross income (AGI) while similar gifts to a private foundation are limited to 20% of AGI. Charitable gifts in excess of the AGI limits result in a charitable carryforward which can be used over the next five years.

Satisfy Required Minimum Distributions (RMDs) via a Qualified Charitable Distribution (QCD)

SECURE Act 2.0 raised the beginning age for required minimum distributions (RMDs) to 73; however, the age for taxpayer eligibility to make a Qualified Charitable Distribution (QCD) remains at 70 1/2

Under this provision, a taxpayer (age 701⁄2 or older) may gift up to $100,000 each year from an IRA to qualified 501(c)(3) charitable organizations (donor-advised funds, private foundations and supporting organizations are excluded).

A qualified charitable distribution neither counts as an itemized deduction nor as taxable income, though it does count towards satisfying the RMD for that year.

This strategy may be beneficial for charitably inclined individuals who receive a greater tax benefit from the increased standard deduction rather than itemized deductions.

[Note: Beginning in 2024, the eligible QCD amount will receive an annual adjustment; the QCD limit is increased to $105,000 for 2024.]


Review Estate Plans and Consider Using the Lifetime Gift Tax Exemption

The Tax Cuts and Jobs Act (TCJA) significantly increased gifting limits, with the lifetime gift tax exemption currently at $12.92 million per person, with a top federal estate tax rate of 40%.

The increased exemption amounts, under TCJA, are scheduled to run through the end of 2025, after which the basic exclusion amount (BEA) is set to revert to the 2017 level of $5 million per person, plus inflation adjustments (estimated to be around $6-7 million per person, in current dollar terms).

While the elevated exemption is scheduled to remain in place through 2025, high-net-worth individuals should not lose perspective of the unique planning opportunity to get additional assets out of a taxable estate.

High-net-worth individuals should evaluate current assets and assess how much might be needed for their remaining lifetime, with consideration to gift “excess assets” to loved ones. Depending on the size of an outright gift, estate planning which incorporates making gifts to trusts may be advisable to provide parameters or safeguards for the intended beneficiaries.

As a reminder, the Treasury Department and IRS issued final regulations in November 2019 clarifying that taxpayers taking advantage of the increased exemption amounts would not be subject to a future clawback, should the exemption amount decrease from current levels


Make Annual Exclusion Gifts

Individuals are allowed to make “annual exclusion gifts” which do not have gift tax implications. In 2023, the annual exclusion is $17,000 per done.

For high-net-worth individuals with – or likely to have – a taxable estate, utilizing annual exclusion gifts is an effective way to reduce one’s taxable estate while also helping loved ones.

As an example, consider Mike and Mary Jones - a very wealthy couple with two married children ( four spouses total) and five grandchildren.   In 2023, the Joneses, as a couple, could gift $34,000 to each of the nine individuals for a combined total of $306,000, without such gifts counting against their lifetime gift exemption.  By regularly making exclusion gifts, the Joneses are able to gradually reduce the size of the their taxable estate.

For those saving for future college expenses, special rules allow a donor to use five years of annual exclusion gifts for contributions to 529 college savings plans (a limit of up to $85,000 for a single taxpayer or up to $170,000 for joint taxpayers).

Finally, it is worth noting that medical payments made directly to a medical provider do not count as taxable gifts. Furthermore, tuition payments made directly to an educational institution do not constitute taxable gifts. Tuition is narrowly defined as the cost for enrollment; it does not include books, supplies or room and board.