- Find out how to avoid holiday gift scams.
- Learn about gifts with tax benefits.
- How does the gift of college tuition become 2 gifts?
- Learn about qualified tuition programs.
- Find information about qualified charitable distributions.
- Learn about donor-advised funds.
- Discover the tax benefits of gifting work equipment.
- Learn the tax rules associated with employee gifts.
- Find information regarding monetary gifts to individuals.
- Learn about the importance of documenting certain gifts.
The holiday season is customarily a time of giving gifts, whether to your favorite charity, family members, or others. But did you know that some gifts even provide a variety of tax benefits? Fiducial recommends taking advantage of year-end gifts before it’s too late!
Avoid Scammers During the Holiday Season
But be wary; during the holiday season, you may receive phone calls, texts, emails, snail mail, or appeals on social networking sites for year-end gifts to various causes. However, some of these appeals may come from fraudsters and not legitimate charities. Unfortunately, this happens every holiday season.
So, before writing a check or giving your credit card number to a charity that you aren’t familiar with, check them out so you can be assured that your donation will end up in the right hands. Follow these tips to make sure that your year-end gifts will actually go to the cause you are supporting:
- Donate to charities that you know and trust. Be alert for charities that seem to have sprung up overnight and that you are not familiar with.
- Ask if a caller is a paid fundraiser, who they work for, and what percentage of your donation goes to the charity and fundraiser. If you don’t get clear answers—or if you don’t like the answers you get—consider donating to a different organization.
- Don’t give out personal or financial information, such as your credit card or bank account number, unless you are sure that the charity is reputable.
- Never send cash. You can’t be sure that the organization will receive your donation, and you won’t have a record for tax purposes.
- Never wire money to someone who claims to be from a charity. Scammers often request donations via wire transfer because wiring money equates to sending cash: Once you send it, you can’t get it back.
- If a donation request comes from a charity that claims to help a local community group (for example, police or firefighters), ask members of that group if they have heard of the charity and if it is actually providing financial support.
- Check out the charity’s reputation online using Charity Watch or other online watchdogs.
Year-End Gifts with Tax Benefits
A Gift of College Tuition
An interesting quirk in the gift tax laws is that an individual can pay a student’s higher-education tuition directly to a qualified school, college, or university, and it will be exempt from gift tax and gift tax reporting. What student wouldn’t love to have part of their tuition paid? It would make a great gift! However, the giver cannot claim a charitable deduction on their income tax return for the tuition they generously paid.
As an aside, college tuition generally qualifies for a federal income tax credit. Another quirk in the tax laws says that the education credit goes to the individual who claims the child (student) as a dependent. This generally results in a gift to the child’s parents in the form of the tax credit.
Example: Whitney is attending college and is the dependent of her mother and father. Whitney’s grandfather makes a tuition payment directly to the college. Since he made the gift directly to the school, Whitney’s grandfather has no gift tax issues. Since Whitney is a dependent of her parents, her parents would claim any available tuition credit. Thus, by paying the tuition, Grandpa gave 2 year-end gifts: tuition to his granddaughter and the tuition credit to her parents.
Qualified Tuition Program (Sec. 529 plans)
These arrangements allow taxpayers to put away large amounts of money, limited only by the projected cost of a college education, which varies from state to state with some plans capped at more than $525,000. The account’s earnings are tax-free if used to pay tuition and certain other college expenses. So, the sooner you fund the account, the more it can earn. There are no limits on the number of donors, age, or income. The contributions are subject to the gift tax if the annual contribution exceeds the annual gift tax exclusion amount ($16,000 for 2022; $17,000 for 2023).
Effective for years after 2017, tax-free distributions of up to $10,000 per year per designated beneficiary are allowed for tuition (no other expenses are allowed) in connection with enrollment or attendance at elementary or secondary schools, including public, private, and religious schools. However, this option should be considered cautiously, as Sec. 529 plans work best when the money put into the plan can grow for a long period.
Qualified Charitable Distribution (QCDs)
Individuals aged 70½ or over can transfer up to $100,000 annually from their IRAs to qualified charities without the distribution being taxable. So, you might want to consider using QCDs for your smaller contributions. Contact your IRA custodian or trustee to arrange the transfer. You must complete the transfer by December 31, 2022, to count for 2022. Since December 31, 2022, falls on a Saturday and is New Year’s Eve, don’t wait until the last minute to initiate the transfer.
A word of caution: Congress, a couple of years ago, increased the IRA required minimum distribution (RMD) age to 72 but still allows QCDs once the taxpayer reaches age 70½. They also repealed the age restriction for making traditional IRA contributions beginning in 2020. This means a taxpayer can make traditional IRA contributions and QCDs after reaching age 70½. As a result, Congress included a provision in the tax law requiring a taxpayer who qualifies to make a QCD to reduce the QCD non-taxable portion by any traditional IRA contribution made after reaching 70½ that was deducted, even if the contribution and deduction are not in the same year. This is a complication you would want to consult a Fiducial representative about before making a QCD.
Donor-Advised Funds (DAFs)
If you would like to make a substantial tax-deductible charitable donation this year but spread the actual distribution of funds to specific charities over a number of years, a donor-advised fund may fill that need. There are multiple reasons why individuals choose DAFs, including making a substantial charitable donation in an exceptionally high-income year.
A DAF is a separate fund (account) set up within a public charity to which a donor makes a contribution. The donor then advises the sponsoring organization on how to ultimately distribute the funds from the account as charitable gifts over the course of many years. The fund doesn’t have to follow the donor’s requests, but most do.
Tax law allows the sponsoring organization to be independent, community-based, religiously affiliated, or connected with a financial institution. Minimum contributions typically range from $5,000 to $25,000. The sponsoring organization manages the administration of the fund and handles the tax reporting. They usually charge an annual fee of 1%, but be aware that they may charge more- make sure to ask about fees if you are concerned about the fees in relation to the charitable distribution.
You get to take a tax deduction for your entire donation in the year you contribute the funds or assets to the DAF. In addition, funds not distributed are invested and grow until eventually disbursed to the charitable organization(s).
If your spouse is self-employed and you purchase tools or electronics used in your spouse’s business, the lower of cost or FMV at the time they are placed in service of these gifts qualify as a business tax deduction on the return for the year when the equipment is put into service.
Year-End Gifts to Employees
It is common practice this time of year for employers to give their employees year-end gifts. If a gift is infrequently offered and has a fair market value so low that it is impractical and unreasonable to account for it, the gift’s value is treated as a de minimis fringe benefit. As such, it would be tax-free to the employee, and its cost would be tax deductible by the employer. However, exercise caution, as any amount of cash given to an employee counts as taxable wages.
Monetary Gifts to Individuals
If you have a high net worth, you are no doubt aware that when you pass away, your estate may be subject to federal (and possibly state) estate tax once the value of your estate exceeds an excludable amount. With the passage of the TCJA, effective in 2018, the estate tax exclusion amount more than doubled. It rose from $5.49 million in 2017 to $11.18 million in 2018. It has been inflation-adjusted each year since, so the 2022 exclusion amount is $12.06 million ($12,920,000 for 2023).
However, in case you have forgotten, most of the provisions of the TCJA are temporary and expire after 2025. At this time the estate tax exclusion will revert back to the pre-TCJA level. Estimating the inflation adjustments, the 2026 exclusion amount would be reduced to approximately $6.25 million. Any amount of your estate in excess of the exclusion amount will be subject to the estate tax, which currently has a top rate of 40%. If married, and the estate passes to the surviving spouse, the estate tax applies to the second spouse to pass away.
Making Gifts During Your Lifetime
The value of gifts you make to individuals during your lifetime reduces the estate tax exclusion amount available to offset the value of your estate when you pass away. However, the estate tax exclusion is only reduced when the gifts you make during life exceed an annual amount. That amount is $16,000 for 2022 and $17,000 for 2023. That annual exclusion applies per individual, meaning you can give up to the exclusion amount to as many people as you’d like every year, whether or not they are related to you, without reducing the estate tax exclusion. Unlike gifts to qualified charitable organizations, gifts to individuals are not tax deductible.
Of course, depending on what happens in Washington, D.C. after the 2022 and 2024 elections, the lifetime gift and estate tax exclusion could be reduced before 2026, or could be extended or made permanent. Congress would need to agree to lower the exclusion amount or extend the higher amount.
Even though gifting assets while living may reduce your estate’s tax liability, the decision to gift assets while still living is a personal one depending upon your particular circumstances.
Additionally, while the estate tax exclusion could decline after 2025, the IRS has said that the value of gifts made before then (when a higher lifetime gift and estate tax exclusion applied) won’t have to be adjusted for a reduced exemption.
To claim a tax deduction for gifts to qualified charitable organizations, you must have substantiation. For cash contributions (gifts paid by cash, check, electronic funds transfer, or credit card), you cannot claim a tax deduction, regardless of the amount, unless you have a bank record (canceled check, bank or credit union statement, or credit card statement) showing the name of the qualified organization, the contribution date and the amount of the contribution. A receipt (or a letter or other written communication) from the qualified organization showing the name of the organization, the date of the contribution, and the amount of the contribution can be substituted for a bank record. For cash contributions of $250 or more and noncash donations, additional requirements not covered in this article apply.
With documentation requirements in mind, here are some words of caution about charitable contributions during the holiday season:
- Suppose you drop cash into the holiday collection kettle. In that case, you likely won’t receive a receipt for your contribution, and you cannot claim a cash charitable contribution as a tax deduction without documentation.
- The same goes for buying and giving new, unused toys to holiday toys-for-kids drives, which have become very popular. Tip: Save the purchase receipt for the toys and request verification of the contribution from the sponsoring organization. If you drop toys at an unmanned drop point and cannot obtain a contribution verification from the organization, the IRS will allow a deduction of up to $249, provided you document the purchase of your donation.
Charitable contributions are deductible in the year in which you make them. If you charge a gift to a credit card before the end of the year, it will count for 2022. This is true even if you don’t pay the credit card bill until 2023. In addition, a check will count for 2022 as long as you mail it in 2022.
Have questions about how any of these suggestions for year-end gifts might impact your tax situation? Call Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations to discuss your situation.