The United States is known as one of the world’s most giving countries when “something happens.” This something could be a hurricane, flood, fire, or most recently, the pandemic. We certainly appreciate Planning with Purpose clients in supporting our efforts to help Mom’s House over the years. I also know that many of you are involved in many other charities, helping animals, the elderly, and children.
Gifting is slightly different. Gifting, at least in the world of taxes, is giving cash, services, or goods to a non-charity. This can be attending and supporting a benefit for someone who lost a house in a fire or needs help with medical expenses. This can be supporting someone by helping them reach their GoFundMe goal on the Internet. This can be donating your time to help a neighbor who cannot shovel their sidewalk. Many individuals think of gifts as cash being given to family members with the expectation that it will not be returned.
Gifting is when you are giving your resources to someone else with no expectation of getting anything in return. The difference between gifting and donating to a charity is based on the recipient. If the organization has filed for and meets the charitable organization’s definition, whatever you give to them is considered a charitable donation. If you are talking about giving to an individual, you are probably giving a gift.
Why do you care? Charitable donations and gifts are treating differently for tax and estate planning purposes.
Charitable contributions can be deductible on your income tax return. New for 2020, you will be eligible to take a $300 deduction for cash and cash equivalent donations to charities. Everyone will get this deduction whether they itemize or take the standard deduction as long as you have the documentation to show that they gave the $300 in cash, check, or credit card. This deduction does not allow for donations of goods or services.
For non-cash contributions such as clothing or food donations and cash donations over and above the $300, the prior rules continue. You can only claim deductions if you can itemize. For a single individual, the standard deduction is $12,400 in 2020. The standard deduction amount for married filing joint is $24,800. If your taxes, mortgage interest, and charitable exceed the standard deduction, you can take the higher itemized deduction amounts.
Gifting is different. You, as the person giving the gift, do not get a tax deduction for a gift. The person receiving the gift does not have to report it as taxable income. While neither the donor nor the recipient reports a gift on their individual income tax returns, there may be other reporting requirements.
The rules allow each individual to give another individual any amount that they want. You can give someone $100,000 or $200 in one year. If you give each person less than $15,000, you have no reporting requirements. You can give each of your three children $10,000 and your grandchild $5,000. You can help an unemployed friend and give him $2,500. You have given a total of $37,500 as gifts this year. Since you did not exceed $15,000 to any one person, you have no reporting requirements.
Take the example instead that you give your three children $50,000 each. Since you exceed $15,000 to each person, you must file a gift tax return. This does not mean you will owe taxes. The gift tax return may simply be an informational return.
Like the standard deduction on your personal income tax return, there is something called the unified credit when dealing with gifts and estates. You can currently gift up to the unified credit amount during your life before you owe taxes on your gifts. The unified credit amount equals the estate tax exclusion, which currently is over $11 million.
If this is the first time you exceeded the $15,000 gift limit, you will file the gift tax return and let IRS know that you are using part of your unified credit amount. You would report you gave each of your children $50,000 and subtract the $15,000 exclusion to have $35,000 remaining. You will reflect on the gift tax return you want to use $35,000 of your unified credit. We would use up $105,000 of our unified credit in our example since we gave $50,000 to each child. No tax would be due.
If in 2021, you elect to give your three children another $50,000 each, you would have to file another gift tax return. You would take the $50,000 and again subtract $15,000 to net to the $35,000. You have now used up $210,000 of your unified credit amount – $105,000 in 2020 and $105,000 in 2021. The gift tax return is cumulative. Each time you file it, you will reflect the amount of credit previously used. If you give away more than the unified credit amount of $11 million, you will have to start paying taxes.
Please be aware that your state may have different rules and regulations regarding gifting and unified credits.
Many individuals try to stay below the annual $15,000 exclusion amount. There are times that you may want to go above that $15,000 exclusion amount if you are providing a gift for a particular purpose. For example, maybe you are providing a down payment on a child’s house.
One of the reasons we often discuss for giving more than the $15,000 is to reduce current income being claimed on a tax return. Maybe you try to reduce your income to avoid paying higher Medicare premiums or qualify for some type of benefits such as NYS’s enhanced STAR program. Before gifting larger dollar amounts, you must make sure that you are comfortable that you will not run out of money in the future.
Gifting stocks that are paying dividends would remove those dividends from your tax return. If you gift stocks, know that your basis becomes the recipient’s basis. If you have 500 shares of IBM stock that you purchased for $40 decades ago when you give them to your granddaughter, her basis is $40. If your granddaughter sells it at $170 a share, she will need to pay taxes on the $130 a share difference. That may be a good situation if your granddaughter is in a lower tax bracket than you are. Giving the stock rather than selling the stock and giving the cash can save the family unit taxes.
Giving the stock can also mean getting the future growth of that stock out of your estate value. It now belongs to the recipient’s estate rather than your estate.
However, if you have a stock at a loss, sell the stock and give the cash. This would mean that you can take the tax loss on your tax return and then give the cash as a gift.
Gifting stocks is different than someone inheriting something at your death. Gifting stocks means your basis becomes the recipient’s basis. When someone inherits stock, they get a stepped-up basis to current market value. Many individuals are gifting funds to avoid potentially losing the assets if a long-term care issue arises. There are special rules concerning time periods before protection occurs, and you want to make sure you consult with a financial advisor to understand these rules. There are also different rules depending on if the gift is considered a complete or incomplete gift.
Gifting money to a child or grandchild to fund their IRA can help with future retirement needs. Gifting money into a College 529 can help provide funds for a future college education. With the existing pandemic, gifting to a friend, co-worker, family member, and even a stranger may seem more satisfying than donating to a charity since you may be familiar with the recipient’s circumstances.
Dropping off a bag of groceries or purchasing a grocery store gift card can make a significant difference in someone not going hungry. Paying someone’s electric or gas bill can mean that utilities stay on for another month. Filling someone’s gas tank can give them the means to look for a job. Gifting coats, mittens, and scarves can mean a child does not have to be cold.
Donating to the local Food Bank is a charitable contribution. Donating to a friend, family member, or a person in need is a gift. With many individuals unable to itemize and take a deduction for charitable contributions greater than $300, you may find that you get more satisfaction gifting to someone you know that has a need.
We want to thank all those that provide donations to charitable organizations and gifts directly to individuals. In both cases, you help those in need, and we want to recognize you for that effort
