Many people use their annual gift exclusion as part of an overall estate planning strategy.
"We had a pretty good year this year. After all the financial changes last year, we decided it was a good time to be more careful. So we watched our budget, took a less expensive vacation, and we actually have substantial savings at the end of this year."
"Yes. Joe and I were also careful. We have been talking. After setting aside part of our cash savings, we could make some gifts this year. Next Tuesday, we're planning to meet with our tax advisor to discuss some gifts."
"Harry and I met with our advisor last week to talk about some end-of-year gifts. We plan to make some gifts to the children and also some gifts to charity."
Gifts to Children and Other Heirs
Sara is wise to consider gifts to children or other heirs. Because they have good income and sufficient assets for financial security, she and Harry can make gifts of up to $17,000 each to their children or other beneficiaries using their annual gift exclusions. Sara and Harry decide to make gifts to their two children. Based upon the $17,000 annual exclusion for two donors and two children, they could give up to $68,000 with no gift tax and no requirement to file a gift tax return.
One good strategy that many parents use is to make a gift of property and to save the cash for themselves. For example, if Sara and Harry own shares of public stock it makes good sense for them to make gifts of their appreciated stock to their children or other heirs. They can then invest the cash themselves and replace the gifted property.
There are two benefits for Sara and Harry if they make the gift of stock. First, the cost basis in the stock flows through to the children. If the children later sell the stock, they will pay the capital gains tax. However, Harry and Sara have avoided paying the tax themselves and recognition of the gain may be deferred for many years. Sara and Harry can place the cash in their investment fund and replace the stock given to children or other heirs.
Second, it frequently is desirable for children and other heirs to receive property rather than cash. Children tend to spend cash quickly for consumer items. Harry and Sara would like their children to learn to save and invest. A gift of stock is much more likely to lead the children to follow the "save and invest" example of Harry and Sara.
Gifts to Charity
Both Sara and Jane are considering gifts to charity. It is a good time for them to consider a cash gift. Because they were careful in budgeting this year, both Sara and Jane have a greater opportunity to make a substantial cash gift this year.
Making a cash gift is quite easy. You can simply write a check to your favorite charity. But it is important to make sure that you follow the requirements of the IRS in order to receive your appropriate tax savings for your gift.
Cash Gifts and the IRS
A cash gift saves tax at your top tax rate. For example, if you are in the 32% tax bracket, then a gift of $100 produces a charitable deduction of that amount. Multiplying the $100 times your 32% tax bracket produces an actual tax savings of $32. Of course, in some states you will also save state income taxes.
Your gift by check may be mailed to the charity. If you place the check in the U.S. mail by December 31 of this year and the check clears, it will be deducted in 2023 even though the charity receives the check next year.
If you make a gift of more than $250 to a charity, you must receive what the IRS calls "contemporaneous written acknowledgment" and what you probably refer to as a receipt. The charity will send you a receipt when the gift is made or at the end of the year when you are preparing to file your tax returns. You must keep the receipt for your records so you can prove the gift qualifies for a charitable deduction.
If you make charitable gifts using payroll deductions, you will be permitted to claim the charitable deduction. In that case, you must retain a pay stub or a Form W-2 from your employer that shows the amount given to charity.
You may also expend cash amounts that are deductible as volunteer expenses. In this case, you should make records of each expenditure that shows the services that were rendered to the charity. It also is important to note whether any goods or services have been transferred by the charity back to you.
Charities sometimes make transfers back to donors. A common type of transfer back is a charity dinner. For example, if the charity charges $100 for a dinner event and the value of the dinner is $18, then the charity will send you a receipt that shows a charitable gift of $82. The IRS has a special name for this gift. They call it a "quid pro quo" gift. If the charity is giving something substantial back to you, such as a dinner, the amount of your deduction is just the charitable part of the payment.
Another possible option is for a charity to give you a token gift. If the charity gives a donor a "low value" item that has the logo, colors or identification of the charity on it, it will be disregarded.
For 2023, donors who make gifts of $62.50 or more may receive items with the name or logo of the charity that are valued at less than $12.50. For donors who make fairly large gifts, the token item may generally have a value up to 2% of the amount of the gift with a limit on the token item value at $125. In the future, those numbers will increase slightly.
If you have been careful in budgeting this year like Sara and Jane, it may also be a very good time to make an end-of-year cash gift. By following the guidelines that are set forth, you can make sure that you have provided a very nice benefit for a favorite charity and also receive your full charitable deduction on your income taxes.