Tax-Smart Gifting: How to Maximize Your Charitable and Family Donations
While the IRS might not typically be viewed as a charitable organization, with the right planning, your donations can benefit you through tax deductions. Whether you’re giving to charity or gifting to family members, understanding the rules around gifting can help you reduce your tax liability while giving to causes or loved ones that matter most.
Charitable Donation Guidelines
Here’s what you need to know when making charitable contributions:
Household Items
- Good condition: Donated items must be in good or better condition to qualify for a deduction, unless the item is valued over $500 and you have a qualified appraisal.
- Written receipt: If the total value of donated household items exceeds $250, you need a written receipt from the charity describing the items.
- Form 8283: If your non-cash contributions exceed $500, you’ll need to complete and attach Form 8283 to your tax return.
Money Donations
- Written receipt or bank statement: For any money donations, you need a receipt or bank statement, regardless of the amount.
- Payment methods: You can donate via cash, check, credit, or debit card. If you donate via credit card in December but don’t pay it off until January, you can still deduct it on your current year’s tax return.
- Payroll deductions: For donations made via payroll deduction, you’ll need a W-2 wage statement or other documentation from your employer showing the total donation for the year.
Qualified Charity Status
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Eligible charities: Only donations to qualified charitable organizations are deductible. You can check an organization’s eligibility status on the IRS website.
Family Gifting Rules
When gifting to family members, there are specific rules you should know to ensure tax efficiency:
Annual Exclusion
- $14,000 per recipient: You can gift up to $14,000 per person each year without it counting against your lifetime gift tax exemption ($5.34 million). If you’re married, you can donate $28,000 per recipient as a couple, to as many people as you wish, as long as no one person exceeds this amount.
- No relationship required: You don’t have to be related to the recipient, and there are no limits on gifts to your spouse.
College Funding
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529 Education Savings Plan: Contributions to a child or grandchild’s education savings plan, such as a Section 529 plan, are an excellent way to support their future. You can contribute up to $14,000 annually ($28,000 for married couples) without triggering gift tax. Money in these plans grows tax-free and can be withdrawn tax-free for educational purposes.
Other Gifts
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Tuition and medical expenses: If you pay someone’s tuition or medical expenses (including health insurance premiums) directly to the service provider, it will not count toward your annual exclusion or lifetime gift tax exemption. This means no gift tax return is needed as long as the payment is made directly to the provider.
Start Planning Your Gifting Strategy
Establishing a tax-efficient gifting strategy for your family and charitable causes is key to ensuring that your financial legacy is passed on in the most effective way. To get started, we invite you to schedule a Family Wealth Planning Session with us. We’ll work with you to develop the best strategies to ensure your legacy of love and financial security is preserved for future generations.
