Conversations with clients around the desire to financially support family, friends, and charities are commonly heard within the walls of Woodward Financial Advisors. We love these conversations because they present another opportunity for us to educate and provide value to our clients, as well as to learn what truly motivates folks to give of their resources. Oftentimes, we find many peoples’ first instinct is to simply write a check, which is generally the easiest and quickest way to give. Cash or check may be fine for relatively small gifts, but when the giving involves a few or many thousands of dollars there is usually a more tax efficient alternative.
For instance, gifting appreciated securities (stocks, bonds, ETFs, or mutual funds) to a family member who is in the 10% or 12% marginal tax bracket can result in meaningful tax savings. This is because the federal long-term capital gains tax rate for taxpayers in these two marginal tax brackets is 0% (although state tax may be owed) [i]. This gifting strategy minimizes or eliminates the recipient’s capital gains tax while also ensuring that the donor does not incur any capital gains tax. If the donor instead sold the appreciated security and gifted the proceeds, they likely would have incurred a taxable capital gain [ii].
This is made even simpler when the recipient is a charity, as they are never subject to paying taxes on capital gains or other gifts [iii]. Gifting to charities also allows for a few additional strategies, which may be of greater benefit when you consider factors such as your age, tax situation, and financial account structure – to name a few. The first of these is called a Qualified Charitable Distribution (QCD) and is generally available to individuals 70 ½ or older with retirement accounts. This is a great way to get an above the line tax deduction, so it is applicable regardless of your income level. The second strategy is the use of a Donor Advised Fund (DAF). Using a DAF provides flexibility to gift cash or appreciated securities to charities over time while bunching the tax deduction into a single year.
If you’re a Woodward client who is interested in discussing how we can incorporate the most tax efficient gifting into your financial plan, please reach out to your advisory team. If you’re not a client and are interested in learning more, please click here and schedule a time to chat with us. We’d love to talk about your gifting plan and see if it makes sense for us to partner on your wealth management needs.
Written by Alex Richani, CFP®
[i] A long-term capital gain is realized when shares are sold more than one year from their purchase date. A short-term capital gain is realized when shares are held one year or less before being sold. Short-term capital gains are taxed at ordinary income rates, which for 2022 can be as high as 40.8% federally (including the 3.8% Medicare Tax).
[ii] When using this strategy, it is important to remember the ‘kiddie tax’ rule. The rules states that children age 18 or younger or who are full–time students age 19 - 24 and are claimed as dependents on their parents’ tax return might have a portion of their investment income taxed at their parents’ rate, which is likely higher than the child’s tax rate.
[iii] Charities are described in section 501(c)(3) and are often referred to as 501(c)(3) charitable organizations.