Did you know that giving gifts to charitable organizations and individuals can reduce your tax liability? Tax-efficient gift-giving is becoming more and more popular. It’s the perfect way to share your good fortune with others while getting some great tax benefits too!

What Are Gift Tax Deductions and Credits?

What are gift tax deductions and credits from the IRS? Taxpayers can make gifts of up to $15,000 per person (the Tax Cuts and Jobs Act increased the limit from $14,000) in 2021 without paying a gift tax. Like federal income tax, this tax works on a marginal tax bracket.

This amount is called the annual gift tax exclusion. Gifts are not just cash—gifts include tangible items such as cars or property. However, you can only use this exclusion once each year for each person you’re giving to, up to a specific lifetime limit. The more you gift one individual, the more you’ll pay in gift taxes, at a rate up to 40% for items with a gift value that exceed the tax exclusion limit.

Which Gift Giving Strategies Help Reduce Your Tax Liability?

There are a few different gift-giving strategies that can help reduce your tax liability. Here are some examples:

• Give appreciated securities instead of cash.

When you give appreciated securities, you don’t have to pay any capital gains taxes on the increase in value since you bought them. You can also take a deduction for the total value of the securities you give.

• Give to a donor-advised fund.

Taxpayers can set up separate accounts with their favorite charities through donor-advised funds. The IRS treats a donor-advised fund as a private foundation, meaning they don’t receive any public benefits. Likewise, they don’t have many rules and restrictions that apply to other types of charitable organizations.

• Cash a life insurance policy.

Taxpayers can cash in a life insurance policy and give the proceeds to a qualified charity. The individual will receive an income tax deduction for the policy’s fair market value after cashing it in.

• Give annuities.

Taxpayers can give annuities to individuals or charities and receive an income tax deduction for the present value of the annuity.

• Use a qualified charitable distribution.

Taxpayers over 70½ can make direct contributions from their IRA to charity and not include those distributions in their taxable income.

What Kinds of Gifts Are Ineligible for Tax Deductions or Credits?

There are some kinds of gifts that you can’t deduct or credit:

• Gifts to individuals. 

Taxpayers may not be able to take a tax deduction for giving an individual a gift of cash, property, stock, etc.

• Property transferred as security. 

Taxpayers cannot claim a gift tax exclusion if they share property as security for future payment, such as making payments on a debt.

• Taxable gifts. 

Taxpayers must include any taxable gifts they make in their lifetime when figuring out how much of the annual gift tax exclusion they have used. Taxable gifts are those over the $15,000 limit or more than the annual exclusion for any number of years.

When making decisions, it is important to consult with a tax professional and a financial advisor. Firms like Pittsburgh-based Fragasso Financial Advisors works proactively with tax and legal advisors to create a coordinated approach.  Fragasso refers to this group of professional advisors as the client’s ‘board of directors.’

In Conclusion

When it comes to gift-giving, there are several tax-efficient strategies that you can use to get some great benefits from the IRS!

Depending on your situation, you can utilize tax deferment, avoidance, and credits, so it is essential to consult with a financial advisor and tax professional to determine what would work best for your unique situation. Annuities, charitable remainder trusts, and appreciated assets are a few of the most popular options to consider.

There are creative ways to make charitable gifts that also save taxes. Fragasso Financial Advisors can help you find what would work best for you and your family! For more information on charitable giving or other financial planning topics, contact Fragasso Financial Advisors today. 

Investment Advice offered through Fragasso Financial Advisors, a registered investment advisor.