Avoid tax pitfalls while gifting this holiday

December is for spending time with family, giving gifts and making charitable donations. As you think about your year-end plans and activities, consider the following tips and reminders regarding making gifts that could help you share your legacy with loved ones and save taxes.

What do I need to remember when giving gifts to loved ones?

Annual gift-tax exclusion

In 2024, the annual gift-tax exclusion is $18,000 ($36,000 for a married couple giving jointly who are U.S. citizens or residences). This is the amount you can give to any individual in a single year without using the federal lifetime exemption or being subject to gift taxes.

• Example: You and your spouse have three children. Together you can gift $108,000 ($36,000 to each child) without using any exemption (further described below).

Exception for qualified medical expenses or tuition

You can make unlimited payments on behalf of others directly to health care providers for qualified medical expenses and to educational organizations for tuition. Qualifying educational organizations may include colleges, universities and private grade schools and high schools. It is critical to keep in mind that you must make the payment directly to the medical provider or educational organization.

• Example: You make a gift to a loved one to reimburse them for their qualified medical expense. Your gift wouldn't qualify for the unlimited exception. However, if you pay the medical provider for the expenses directly, it would qualify.

Superfunding a 529 plan

Superfunding a 529 plan means individuals can make a lump-sum contribution of up to five years’ worth of annual gift-tax exclusions to fund a 529 plan in a single year. This allows the money to be invested in the tax-advantaged account longer, providing an opportunity for growth.

• Note: You won't be able to gift additional money to the recipient during that five-year period without incurring gift taxes or utilizing a portion of your lifetime exemption if you fully superfund the 529. If you choose to superfund, you'll need to file a gift tax return. If you die within the five-year period, a pro rata portion of the gift must be added back into your estate.

I want to make a large gift. What's the federal lifetime estate and gift-tax exemption?

If you're interested in making larger gifts, you can utilize all or a portion of your lifetime estate and gift-tax exemption amount, which in 2024 is $13.61 million and is separate from your annual gift-tax exclusion amount. However, any amounts you give over the annual gift-tax exclusion limit reduce your lifetime exemption and the amount you’re able to transfer federal estate tax free to your heirs when you pass away.

• Note: If there are no legislative changes, the exemption is scheduled to be reduced to approximately $6.5 to $7 million at the end of 2025.

Charitable deductions

What are the tax breaks?

When you file your taxes, you can claim a standard deduction (which is available to everyone) or itemize your deductions. To take advantage of most charitable donations, you must itemize your deductions. Itemized deductions include items such as charitable donations, mortgage interest, state/local income taxes, property taxes and unreimbursed medical expenses (all within limits).

• The 2024 standard deduction is $14,600 for single filers or $29,200 for married filing jointly. To benefit from your charitable contributions, your itemized deductions (which include your charitable donations) would need to exceed your standard deduction. In that case, by itemizing, you may owe less in income taxes.
• One way to take advantage of itemizing is to bunch multiple years of charitable gifts into one year rather than spreading them across multiple years, increasing your itemized deductions above the standard deduction. If you don’t want to give the entire gift to a charity in one calendar year, explore whether a donor-advised fund (DAF), such as the Edward Jones Charitable Gift Fund, would allow you to meet your goals.

What impacts my charitable income tax deduction amount?

The amount of your charitable deduction is generally based on the fair market value of the donated asset or its basis (typically the amount you paid for it), your adjusted gross income (AGI) and the type of organization you supported (public charity or private foundation).

• The total amount of your charitable deduction is limited to a percentage of your AGI. The higher your AGI, the larger the possible charitable income tax deduction you’d be able to claim.
• Different types of assets have different AGI limits. Cash typically has the highest income tax deduction limit, but other assets may offer alternative tax advantages that make them more attractive for contributions.
• If you give more than you can deduct in one year, you can carry forward the extra amount for up to five future tax years.

Three common assets donated to charity

Cash: Cash is frequently gifted to charity as it is easily transferable with a known market value. Your deduction for a cash gift is limited to 60% of your AGI when donated to public charities and 30% for private foundations.

Appreciated securities: Many choose to donate stock that has increased in value because you receive a charitable deduction for the fair market value of the stock, and you don't realize the capital gains on the sale since it was donated. Your deduction is limited to 30% of your AGI when donated to public charities and 20% for private foundations.

• Note: If a stock's value has decreased, your tax deduction is limited to its current value. You may want to consider selling the security, donating the proceeds and using the realized loss to offset other taxable gains.

Qualified charitable distribution (QCD): A QCD involves donating a portion of a traditional individual retirement account (IRA) or Roth IRA directly to a qualifying charitable organization. It's only an option if you are at least 70½ at the time of the distribution. QCDs can satisfy your required minimum distributions (RMDs) up to $105,000 annually. The amount of the QCD isn't included in your AGI, potentially lowering your tax liability.

• Note: You can benefit from a QCD even when you take the standard deduction.

There are many considerations when making gifts to loved ones and charities. An Edward Jones financial advisor can discuss how giving to loved ones and charities may impact your overall financial strategy and goals.