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Gifting Strategies to Minimize Your Tax Bill

Jeffrey W. Clark, CPA, MST Director, Tax Strategies, Small Business Advisory

When we think of gifting, often two types come to mind. The first is traditional gifting of cash or property to family. The second type is gifting to charitable organizations. Traditional gifting typically does not reduce your current year income tax liability but will reduce the impact of federal estate tax when you die. Charitable gifting, on the other hand, results in a current year tax deduction and can also reduce your future estate tax liability since those assets are no longer in your estate. This article will highlight a few ways to incorporate both types of gifting into an overall income and estate tax planning strategy.

When pairing an estate plan with philanthropic interests, size matters. A $50 gift to the local fire department will not go very far to reduce your overall federal taxable estate. However, combining a cash gift with a gift of appreciated securities will go much farther.

Tax-exempt charities do not pay federal or state income taxes. The charity can sell the appreciated securities and benefit from the full sale proceeds. When you factor in the 20 percent federal capital gains tax, 3.8 percent Medicare surtax, and 3.07 percent state income tax (in the case of Pennsylvania), your gift is almost 37 percent greater than if you personally sold the securities and donated the after-tax proceeds.

Have you considered a donor advised fund (DAF)? These funds allow you to make a large one-time donation and then control when and how the funds are disbursed. The full amount of the contribution to the DAF is deductible in the year it’s funded. Should you exceed the adjust gross income (AGI) limitation, excess donations can carryover for five years until fully utilized.

One strategy for anyone nearing retirement is to “bunch” your donations and contribute to a DAF in the final year of employment while you’re still in a high tax bracket. For example, contributing $100,000 in a year when you’re in the 35 percent tax bracket will result in an effective tax savings of $35,000. If you waited and donated $20,000 in each of the following 5 years when your marginal tax bracket is lower, say 22 percent, it would result in a tax savings of only $4,400 per year over 5 years, totaling $22,000. This example does not take into consideration the impact of the higher standard deduction.

Certain types of trusts can be utilized in an estate tax plan as well as a charitable giving plan. Charitable remainder trusts, as the name implies, provide you with a lifetime income stream. Upon your passing, the assets of the trust go to a predetermined charity and, as such, are excluded from your federal taxable estate. Charitable lead trusts, on the other hand, provide for a lifetime revenue stream to a charity of your choosing. Upon the initial transfer to the trust, you would receive a charitable donation equal to the present value of the future revenue stream. If all conditions are met, the remaining assets are returned to your beneficiaries upon your passing and are exempt from federal estate tax.

When crafting an estate and philanthropic gifting plan, it’s important to keep in mind that the current lifetime estate tax exemption of $12.92 million is scheduled to revert back to nearly half that amount, approximately $6.2 million, at the end of 2025 to. Barring any legislative changes, a proactive strategy can save millions in estate tax and you can pass that savings along to your family.

If you have any questions or would like assistance in assessing your estate planning and philanthropic goals, please contact a member of Kreischer Miller’s Tax Strategies team.

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Jeffrey W. Clark, CPA, MST

Jeffrey W. Clark, CPA, MST

Director, Tax Strategies, Small Business Advisory

Small Business Advisory Specialist

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