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.
Consider giving gifts through a 529 education plan. Anyone, including grandparents, can contribute up to $15,000 per year ($30,000 for married couples electing to split gifts) to any individual’s 529 plan, without incurring federal gift tax or using the federal lifetime gift tax exemption.
Many states offer state income tax deductions to residents who contribute to their own state’s plan, while other states offer tax deductions regardless of which plan you invest in. Additionally, unique to 529 plans, the federal tax code allows you to front load up to five times the annual gift tax exclusion in a single year.1 Single individuals are therefore able to contribute up to $75,000 per recipient in a single year, while married couples electing to split gifts 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’ worth of contributions in January, effectively making six years’ worth of contributions in just two months.2 Also note that 529 plan account owners may now take federal income tax-free 529 plan distributions for certain apprenticeship expenses and student loan repayments.3
Morgan Stanley recently launched the Morgan Stanley National Advisory 529 Plan, the first 529 plan of its kind, made available nationwide, and offered exclusively to Morgan Stanley clients. You can select from goals-based asset allocation portfolios, guided by Morgan Stanley thought leaders, that align with your unique time frame, risk profile and goals, while gaining access to institutional caliber fund managers and pricing. Speak with your Morgan Stanley Financial Advisor or Private Wealth Advisor and your personal tax and legal advisors to determine whether this strategy might be appropriate for you.
Make financial gifts before year end to help reduce estate taxes. You can gift up to $15,000 ($30,000 for married couples electing to split gifts) per recipient to an unlimited number of individuals per year without incurring a federal gift tax. Note that you can’t carry over unused annual 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 federal gift tax exemption of $11.7 million for individuals or $23.4 million for married couples in 2021.4 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 count against your $15,000 annual exclusion for gifts or reduce your federal lifetime gift tax exemption.
Appreciated investments 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 one year or less.5
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.6
A Grantor Retained Annuity Trust (GRAT) may allow you to pass the appreciation in the value of assets in the GRAT, in excess of a hurdle rate set by the IRS (known as the 7520 rate), to your beneficiaries with potentially little to no federal gift tax consequences. Given the low interest rate environment, this may be an even more attractive opportunity. Speak with your Tax and Financial Advisor to see if this strategy may make sense for you.