In the movie “Knives Out,” an 85-year-old mystery author of enormous means has decided he no longer wants to financially support any of the adults in his family.
Needless to say, he doesn’t live much longer after he tells them (this is not a spoiler), and the question of whether it was a suicide or a whodunit colors the film.
This time of year, much is spent on the whys of giving — it’s prosocial, it can make you happier, it can make money have less control over you — but we don’t often spend enough time talking about the ways of giving, be it to charities or friends and family.
The 2017 tax law has hampered the tax benefits of donating to charity. Charity is an itemized deduction. The tax law change has made it much more difficult to itemize.
The nuts and bolts
In order to itemize if you are single, you need over $12,200 of deductions, of which no more than $10,000 can come from your property and state income taxes paid.
If you are married, this standard deduction rises to $24,400 (but the property and state income tax limits stay the same). To get to over $24,000, you need a lot of mortgage interest or health care costs to itemize.
While gifts to charity can get you to the deduction level, the dollars it takes to get there don’t really provide a tax benefit. But this doesn’t mean that you can’t still get some tax benefits from giving.
Minimum distributions and giving
The first strategy is a no-brainer for those with IRAs and who are over 70 ½. At that age, you must begin taking required minimum distributions (RMD) from your IRA.
If you are charitably inclined, you get the absolute best charitable benefit — the qualified charitable distribution (QCD).
This is a direct transfer from your IRA custodian to a qualified charity. This never shows up as income on your tax return so it doesn’t affect credits or costs for things like Medicare. It is as pure a gift as you can possibly make.
You can use the QCD to satisfy your RMD. You can give up to $100,000 each year; if you’re married, your spouse can do the same out of his or her IRA.
How stock gift can pay off
The second thing you can do, regardless of whether you itemize, is give away appreciated stock.
If you don’t itemize, you don’t get the tax deduction, but you also don’t have to pay tax on the gains on the stock you donate.
If you donate to a bunch of small charities, it may be easier to set up a donor-advised fund through a brokerage firm or local community foundation. That way, the stock goes in and then you direct your gifts to the charities you choose.
If you don’t know where to give yet, you can leave it in there or have it invested. With this approach, you lose some control, but you gain other benefits.
If you like the donor advised fund or community foundation strategy, consider bunching two or three years of your expected donations when you donate the stock. This may allow you to get some tax benefit.
If you make smaller gifts every year, bunching gives you a better chance of maximizing the impact of your gift.
Giving to friends and family
Now let’s turn to the nontaxable and nondeductible giving to friends and family. Every year, you can give up to $15,000 to whomever you want and to as many people as you want.
The recipient pays no tax on the gift and you receive no deduction. If you give someone stock, they take over the gains that you had in the stock. When they eventually sell it, they pay the capital gains tax at their rate.
If you give more than $15,000, you simply need to file a gift tax return. The gift tax return means that you eat up some of the $11.4 million dollar exclusion that the government gives you before estate taxes kick in (if you’re married, the number is $22.8 million).
Those are the facts, but what else is there to consider? First, all gifts to family and friends create an imbalance of power.
This is not good or bad, it just is. Some people handle this better than others. So while the gift is often greatly appreciated, it can also be confusing and affect the nature of the relationship.
When a gift isn’t a gift
Second, there is a difference between a gift and a contract. A contract involves payment for performance; a gift is a simple act of generosity.
Parents often test their kids with gifts to see if they would handle things in a way they like.
This pay to play is not a gift, it is a unilateral contract. Most people who enter into contracts understand what is expected of them. In fact, if they don’t want to perform on the contract, they don’t need to enter into it.
Third, if you are making a gift, don’t have any expectations about it.
If you are hoping the beneficiary responds in a particular way, you may be disappointed. It is no mystery that the best outcomes are from giving freely without expecting anything in return.
Ross Levin is the chief executive and founder of Accredited Investors Wealth Management in Edina.