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5 invaluable pieces of advice when it comes to tax-efficient gifting

Have you ever thought about the ins and outs when it comes to gifting? (Photo by Andrea Piacquadio from Pexels)

If you’re looking for ways to gift some money, to ultimately lower the value of your estate or tax liability for the year, you’ve come to the right place.

Although some of these strategies may be changed or repealed if the tax law were to change (if the law impacted estate and gift taxes, that is), the following items are important considerations and good places to start.

Without further ado, here are several smart ways you can gift.

1. Make a gift outright, to anybody.

The annual gift-tax exclusion is $15,000 per donor, per recipient. That means you can gift $15,000 to anyone, such as a relative, friend or, if you are feeling very generous, a stranger, each year, without impacting your federal gift taxes or having to file a gift tax return.

A couple can gift to their child and spouse to the tune of $60,000, as each spouse can give the child $30,000 and the child’s spouse $30,000. If grandchildren are involved, the couple can give $30,000 annually to each grandchild, as well.

In addition, gifts to pay tuition or medical expenses are also free of gift tax.

To qualify for this break, the giver must make the payment directly to the institution. This can be done on top of gifting the $15,000 referenced earlier.

2. Gift highly appreciated stock.

If you happen to have stock with a very low cost basis, you can gift it to a family member in a lower tax bracket -- and they will then have to pay the taxes if they sell it, but at a lower rate.

If you gift the stock to charity, the charity can then turn around and sell it at no capital gain.

Even if you have various lots of the same stock, you have the ability to select the lot with the lowest basis and gift from that specific lot.

Assuming the law does not change, if you are older, it may make sense to hold on to highly appreciated securities as your heirs receive a step-up in basis when inherited.

3. Gift using your IRA.

Although there are no tax advantages for gifting to family or friends through your IRA, you can gift to a qualified charity directly, and the charitable contribution avoids taxes completely.

Funds in an IRA are, for the most part, never taxed, and if gifted directly to charity, are not taxed.

Annual QCDs are limited to $100,000 per person -- and QCDs can only be made from IRAs, and not company retirement plans such as 401ks.

You have to be 70.5 (and be taking required minimum distributions to qualify).

The amount donated reduces your required minimum distribution, and effectively lowers your taxes.

For example, if your RMD is $50,000 and you gift $20,000 directly to charity, you are only required to distribute the $30,000 balance. You will only pay taxes on $30,000 at ordinary income rates – this means you have reduced your income by $20,000.

Gifting directly to charity from your IRA, providing you plan to gift anyway, allows you to give away pre-tax funds that will never be taxed.

One of the common ways to do this is to request checks for your IRA account and then write the checks directly to qualified charities. Gifting electronically on a charity’s website has become a more common method, but unfortunately, this does not work with an IRA, as custodians don’t issue debit cards on IRAs.

4. Consider using donor-advised funds.

In high-capital-gain tax years, such as with the sale of a business, you have the ability to donate funds to a Donor Advised Fund (DAF) and then make gifts to qualified charities from the DAF each year.

If you plan to gift a certain amount each year, this front-loads the gift, allowing you to take the deduction in the high tax year.

Assuming a donor gifts $20,000 to charity each year, but this year, they sold their share in a law firm due to retirement and made $1 million, they can fund a DAF with $400,000 and get an immediate deduction, lowering their taxes on the sale -- and continue to gift the $20,000 each year for the next 20 years.

Keep in mind, you will not be able to take a deduction in subsequent years when you gift from the DAF.

Also, once funds are transferred to a DAF, this is a completed gift and the funds are no longer accessible for lifestyle expenses. You would not want to fund the DAF with money you need in retirement, just to avoid taxes.

5. Think about some strategies using trusts.

There are more complex trust strategies available, such as Spousal Lifetime Access Trust (SLAT), which allows couples to gift to the next generation but still allows you access to the funds if needed.

Talk to your estate attorney about your specific situation if this is something you want to investigate.

Evensky & Katz / Foldes Financial Wealth Management is a firm with more than 35 years of experience that specializes in financial planning and goals-based investment management. Its investment management services include portfolio construction, risk management, manager selection and asset allocation. “The integrity of our advice and commitment to quality client services sets us apart in a crowd,” the group says. Click or tap here to learn more.