Aurora’s Gift-Giving Guide

As the holiday season comes upon us, giving gifts is now top of mind for many across the nation. While preparing for Black Friday deals and telling your kids stories about Santa Claus, putting presents under your Christmas tree is only one of the gift-giving methods to ponder at the end of the year.

Have you ever considered giving the gift of money? I’m not talking about Amazon gift cards or $5 lottery scratch-offs that won’t win you anything. Rather, I was alluding to donating to charities or passing money to a younger generation. It certainly takes some kindness from the bottom of your heart to give away your hard-earned cash, but there may be financial benefits to gifting money if you are in a position to do so.

Gifting to a Charity

Gifting cash, securities, or property to a charity or other nonprofit, like a school or a church for example, can be beneficial from a tax standpoint. For those who itemize deductions come tax time, charitable donations can help lower your taxable income, and there are multiple ways to accomplish these types of deductions.

Standard Charitable Donations

You can donate cash or property to a charity and receive a deduction for it. In most cases, to actually receive your deduction, you will need a receipt from the organization acknowledging your donation. The receipt will then be submitted with your tax return, helping prove that you are deserving of a tax deduction.

Donor-Advised Funds (DAFs)

Donor-advised funds are investment accounts that allow you to donate cash or highly appreciated securities to charities. With these donations, you may shift an asset with a large capital gain to a charity, saving you from realizing those gains on your tax return. As the donor, you are able to select which assets you are gifting as well as what charity you are donating to. You may also have a say in how the assets will be used by the receiving organization.

Qualified Charitable Distributions (QCDs)

There is a special type of donation called a Qualified Charitable Distribution. You can take a deduction for these donations even if you use the standard deduction when filing taxes. There are a few caveats to obtaining this deduction though. First, you must be at least 70 ½ years old. Next, the contribution must be transferred directly from an IRA or Inherited IRA to a charity or non-profit.

Clearly, not everyone qualifies for this type of deduction. If you do qualify though, you can exclude a maximum of $108,000 per person from your taxable income. For eligible individuals inclined to donate to their favorite charity or nonprofit, this would be quite the tax efficient way to do so.

Gifting to Future Generations

Passing down assets during your lifetime can be a great way to help the younger generation get ahead with their finances. Similarly to donating to charities, there are various ways to shift money to the younger generation, some of which even have tax benefits.

Uniform Transfer to Minors Act (UTMA)

An UTMA account is an investment account that allows adults to invest money on behalf of their children or grandchildren. The adult acts as the custodian, or controller, of the account until the child reaches the age of termination for their given state (age 21 for Indiana). Once the child turns the required age, the account is transferred to them tax-free, and they will have full ownership of the account from there on out.

529 Savings Plan

A 529 Savings Plan is an investment account that helps fund education expenses for the student who is listed as the account’s beneficiary. The funds in the account can be used for college or trade school tuition, K-12 tuition, textbooks, and other educational supplies. The money can even be used to help pay back student loan debt, up to $10,000 per beneficiary for their lifetime.

While covering education expenses is the main goal with a 529 Plan, there is a newer little-known benefit to these accounts. Due to the SECURE Act 2.0, excess funds may also be rolled over into a Roth IRA in the beneficiary’s name. This would be an awesome gift as Roth IRAs provide tax-free growth and tax-exempt income in retirement.

You may be eligible for a tax credit at the state level if you contribute to one of these accounts. For example, Indiana will give you a tax credit worth 20% of your contributions up to a $1,500 amount taken off your state taxes. Some other states offer similar credits as well.

Gifting Through a Trust

Gifting assets through a trust can be an impactful way to direct your money to future generations. When using a trust, a trustee is named to help guide the distribution of assets when the time comes to do so. If you know you want to leave money to a child, but don’t want them to have access to the funds until they are at a certain age, a trust can help you accomplish that. The trustee can also send the beneficiary money periodically in case you are concerned of a spending spree with a lump sum inheritance. There are even trusts that allow the continued use of assets during your lifetime, then the remainder of those assets passes to the listed beneficiaries one day.

One of the main benefits of trusts is they can help you remove assets from your estate so that your beneficiaries can receive their inheritance without paying much in taxes, if any. As of now, the federal estate tax exclusion is $15 million, and Indiana does not have a state-level estate tax; however, many states do. While most people won’t have a $15 million estate to pass on, we cannot guarantee that laws don’t change in the future to lower that exclusion number. We cannot stop state laws from changing either. Although it appears there may not be obvious estate tax benefits to gifting through a trust, that might not be true 20 or 30 years from now. 

Present-Day Gifts/Annual Gifting Limits

We covered a few ways to give money to younger children, but what if you want to make a gift to an adult child or grandchild, or even to a friend? How does that work?

You certainly can give a gift of money to your adult child or your friend. Helping pay for a wedding, buy a new house, buy a new car, or pay for a vacation are common ways to make present-day gifts to adults. You can even just hand them a wad of cash if you wish. 

Unsurprisingly, Uncle Sam does collect a tax on reported gifts; however, there is an annual exclusion of $19,000 you can give to each recipient, and the number of recipients you give money to is unlimited. You can also split gifts between spouses, so a married couple can give a recipient a gift of $38,000 without incurring any taxes. If you go over the annual limit, you don’t actually owe a tax penalty. There is a lifetime gift tax exclusion of $15 million that your excess gift would be subtracted from.

The Bottom Line

Gifting money around Christmas, or really any time of the year, can be a tremendous way to help others while also potentially lowering your taxable income. If you are interested in giving gifts to a charity or loved ones, or if you are curious how some of the tax deductions mentioned in this blog work in practice, please reach out to a member of our team. Aurora would be happy to assist you with building a gifting strategy that helps achieve your goals and lower your tax bill.

Ready to take the next step?

If you have follow-up questions or want to make sure you’re setting yourself up for success, reach out to the Aurora Financial Strategies team for a free conversation.

You can also email me directly at Billy@auroramgt.com.

Billy Cardwell, CFP®
Founder and President of Aurora Financial Strategies, a financial advisory firm based in Central Indiana.