Tax Planning: How Gifting May Fit into Your Tax Planning
By Saghir A. Aslam
Rawalpindi, Pakistan
(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the Ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities).
April 15 marks the end of the 2022 tax season. While that's certainly significant, it doesn't mean it's time to forget about taxes. Instead, this is the time to turn your focus to tax planning for 2023. A good place to begin is by considering these giving strategies:
Gifting to individuals
- Evaluate the tax benefits of gifting long-term appreciated stock versus cash. Your cost basis and holding period will transfer to the recipient. If the recipient is in a lower capital gains bracket than you, some tax savings may result when the recipient sells the stock. If the recipient is under age 24, make sure you are familiar with the "kiddie tax" rules.
- If you gift stock in a loss position, the recipient cannot claim your loss as a deduction. However, any appreciation in the stock from the value on the date of the gift up to your original basis will not be taxable to the recipient. Instead, consider selling the stock so that you can use the loss yourself, then gift the cash.
- Be aware of the five-year gift rule when gifting to a 529 plan. You may elect to gift five years of annual exclusion gifts in one year without using any of your lifetime gift exclusion. This year the annual exclusion is $15,000. As a result, you're allowed a $75,000 gift to a 529 plan for each beneficiary. A married couple could transfer up to $150,000 out of their estate in one year for each beneficiary. Keep in mind this could have estate tax implications if the donor dies before the five-year gift period has passed; no other gifts may be made to the beneficiary within the five-year period.
- Special rules apply for certain gifts. You can pay school tuition or medical expenses for someone else without limitation. If the expenses are paid directly to the school or medical provider for the benefit of someone else, they do not count against your annual exclusion or lifetime gift exclusion.
- Gifts to individuals are not considered taxable income to the recipient and are not deductible by the giver for federal income tax purposes. Some states will allow deductions for 529 plan contributions.
Gifting to charity
- If you expect to realize significant gains this year from investment transactions or a sale of a business or real estate, consider implementing a charitable strategy to help reduce your tax bill on these gains. Your financial advisor could discuss a variety of strategies to consider. Ask for copies of our "Charitable Giving Strategies" flyer and "What You Need to Know About Qualified Charitable Distributions" fact sheet.
(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, nor does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr Aslam does not have anything for sale.)
