It’s been a solid year for most investors. For those who are charitably inclined, this holiday season could be a good time to share your good fortune and consider gifting to the family members, friends and causes you care about. It’s also the time of year when our clients are looking ahead to tax season and are asking about ways to give both thoughtfully and tax-efficiently. 

Last year, Americans responded to challenging times by giving top charity in big ways, resulting in an outpouring of generosity. Charitable giving in the U.S. reached a record $471 billion in 2020, with 78% of that amount coming from individuals and bequests (as opposed to corporations and foundations). 

Here are just a few ways to make the most of charitable giving this year. 

Giving cash may be the simplest approach

The quickest way to give to family members or a charity is by donating cash. However, if you are giving to family members, there are some things you need to consider, such as the federal annual gift tax and lifetime gift tax exclusions, so you won’t be saddled with an unexpected tax bill. When giving sizeable amounts, you need to keep in mind how the lifetime exemption affects gifts accumulated over your lifetime. 

• Annual gift tax exclusion: In 2021, the annual gift tax exclusion is $15,000. This means you can give up to $15,000 to each of your children or grandchildren this year without paying any gift tax. Your spouse can gift those same amounts each year as well. (In 2022, the exclusion will be adjusted to inflation and will increase to $16,000.) But you need to pay attention to how these gifts add up. If you give more than these amounts, the amounts in excess of the exclusion amounts reduce your federal estate tax exemption when the second spouse dies. 
• Lifetime gift tax exemption: In 2021, the federal lifetime gift tax exemption is $11.7 million (doubled for married couples, to $23.5 million). This means you can give up to $11.7 million in gifts over your lifetime (or $23.5 million together with your spouse) without having to pay a tax on it. The IRS recently announced that the federal lifetime gift tax exemption will increase to $12.06 million in 2022. Couples that have already maxed out their lifetime exemption now will be able to give away another $720,000 in 2022. But take note: Lifetime exemptions are higher than they have ever been; if future tax laws reduce that exemption amount, it could affect your gifting plans.
• Gifts to charity: You can give cash to charities and still claim a deduction; just make sure you get a receipt from your chosen organization or some other proof of the donation. For any gifts over $250, you must have a written acknowledgement in order to claim a deduction.

Gifting individual securities 

It’s possible that securities held in your taxable accounts may have appreciated handsomely over the past decade and have some imbedded long-term cap gains. You can donate appreciated shares of these stocks to a non-profit and avoid paying a capital gains tax on any interest that’s accrued since you bought them. 

That said, if you are thinking about gifting stocks that actually lost money, it might be smarter to sell them and donate the cash. (And the recipient may appreciate the favor of not being handed a stinker!) And to avoid the year-end crunch, make sure you submit your donation instructions in writing to your broker-dealer or bank at least a week before December 31 so that it can be processed.

Donor advised fund

A donor advised fund (DAF) will allow you to donate a large amount now, taking the charitable deduction, but spread the actual charitable giving over time. A benefit is you don’t need to identify the charitable right away. Many folks prefer to set up a DAF in a year they receive a windfall or sell securities or a business, take the charitable deduction to offset their taxes, and then distribute their giving over many years from that DAF. As with donating securities, be sure to check with your broker-dealer or bank to see how much time they need to process the paperwork to set up the DAF.

Remember, tax laws are complex and may change 

Many rules governing charitable giving have changed over the past several years, and it’s important that you check with your tax professional before you embark on a charitable giving strategy. A financial professional can also advise you on certain tax-efficient strategies to support your charitable giving, whether you are interested in giving over your lifetime, or whether your goal is to give to charity after your death while receiving current income. 

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

Bruce Helmer and Peg Webb are financial advisers at Wealth Enhancement Group and co-hosts of “Your Money” on KLKS 100.1 FM on Sunday mornings. Email Bruce and Peg at yourmoney@wealthenhancement.com. Securities offered through LPL Financial, member FINRA/SIPC. Advisory services offered through Wealth Enhancement Advisory Services, LLC, a registered investment advisor. Wealth Enhancement Group and Wealth Enhancement Advisory Services are separate entities from LPL Financial.