If you’re inclined to help others, consider these tax-efficient ways to make your giving go further.
Many of us prefer to combine our support for the causes and people we care about with a desire to save on taxes. Fortunately, there are strategies to help us accomplish both. Whether you want to donate to charity or invest in a loved-one’s future, consider these tax‐smart ways to make your giving go further.
Appreciated investments that you have owned for more than a year can be donated to qualified charitable organizations. Note that donating appreciated investments that you have owned for more than a year can allow you to take a larger deduction than donating appreciated investments that have been held for less than a year.1
The limitation on the deduction amount for qualifying charitable cash contributions (60% of AGI for individuals who itemize) has been suspended for 2020. This means that cash contributions to charity in 2020 are generally deductible up to 100% of AGI on individual federal returns. This suspension does not apply to contributions to a supporting organization, including private foundations or a Donor Advised Fund.
A Donor Advised Fund (DAF) is one option for gifting appreciated investments. A DAF, such as the Morgan Stanley Global Impact Funding Trust (MS GIFT), gives taxpayers a tax-efficient way to donate stock, mutual funds or other assets and claim a tax deduction.2
Make financial gifts before year end to help reduce estate taxes. You can gift up to $15,000 to an unlimited number of individuals per year without incurring a gift tax. Note that you can’t carry over unused exclusions from one year to the next. The transfers may help your family as a whole pay fewer taxes if you give income-earning property to family members in lower income tax brackets. The $15,000 annual exclusion doesn’t count against the estate-tax exemption of $11.4 million for individuals or $22.8 million for married couples in 2019 ($11.58 million for individuals or $23.16 million for married couples in 2020).3 It is noteworthy that gifts in the form of tuition payments made directly to an educational organization, as well as medical expense payments made directly to the provider, are not taxable gifts and do not reduce your annual $15,000 gift tax exclusion or your lifetime estate tax exemption.
Consider giving gifts through a 529 education plan. Anyone, including grandparents, can contribute up to $15,000 per year ($30,000 for married couples filing jointly) to any individual’s 529 plan, without triggering the gift tax. Many states offer state income tax deductions to residents who contribute to their own plan, while other states offer tax deductions regardless of which plan you invest in. Additionally, unique to 529 plans, the tax code allows you to front load up to five times the annual gift tax exclusion in a single year.4 Single individuals are therefore able to donate up to $75,000 per recipient in a single year, while married couples filing jointly can contribute up to $150,000 per recipient in a single year. If you have the means, you can even take advantage of six-year gift tax averaging. To do this, you can contribute one year's worth of gifts in December, followed by five years of contributions in January, effectively making six years’ worth of contributions in just two months. 5, 6
Speak with your Morgan Stanley Financial Advisor or Private Wealth Advisor and your personal tax and legal advisors to determine which strategies might be appropriate for you.