Smart ways to give to family and your favorite causes

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Whether you want to give to a charity, a family member or a friend, these tax-wise strategies may increase the value of your gift to the recipient — and yourself.

Key points

  • You can donate appreciated stocks directly to a charitable organization, which may be more tax advantageous than selling them and donating the net proceeds
  • In general, you can make a gift of up to $15,000 in 2020 to anyone you want without having to pay the federal gift tax
  • You can contribute five years' worth of annual exclusion gifts at one time — up to $75,000 in 2020 — to a 529 plan without incurring a gift taxFootnote 1
  • Learn more about donating financial gifts
Sharing your good fortune with others could mean donating money to a charitable organization that aligns with your values. It could also mean helping family and other loved ones with financial gifts. Once you've identified the causes — or people — you'd like to support, the next step is to decide how you want to do it. Beyond simply giving money directly, there are strategies that can help both you and the recipient get the most out of your gift.

Charitable giving

Donate stocks or other assets
If you have appreciated capital assets you've held for more than a year, such as stocks, there may be advantages to donating those directly to the recipient instead of selling them and paying tax first and then donating the net proceeds. By donating appreciated assets directly to a not-for-profit:
  • You allow the organization to receive the full pretax value of those appreciated assets
  • You may avoid long-term capital gains taxes you might otherwise owe
  • You may be able to deduct the full value of those assets on your tax return as a charitable gift
For example: Suppose you sell $1,000 worth of stock that you've held for more than a year in order to donate the proceeds to a charitable organization. After paying any capital gains taxes, you'd be left with less than $1,000 to give to the charity. But if you were to donate that same $1,000 of appreciated stock directly to the organization:
  • The organization can usually sell the stock and receive the full $1,000, tax-free
  • You could potentially deduct the full $1,000 value of your donation on your tax return
This practice isn't limited to stock investments. It may be worth asking your tax advisor about the possibility of donating other appreciated assets you might own, such as art or real estate.
Open a donor-advised fund
An alternative vehicle for giving money to causes you support is a donor-advised fund. You donate to the fund and then inform it as to which qualified charitable organizations you'd like your donations distributed. In the meantime, the money in your account can be invested to potentially grow over time until you decide to make a donation.
Some of the benefits of contributing to a donor-advised fund:
  • Generally, it allows you to take the tax deduction for any donations you make to it in the year you make the donation
  • The fund doesn't disburse the funds in the year in which you make the donation
  • You have the ability to contribute appreciated securities to your donor-advised fund
  • It can simplify your recordkeeping. Rather than keeping receipts from every charity you donate to throughout the year, you need to retain only one year-end statement.
If you are age 70½ or older, donating money directly from your IRA to a qualified charity can count toward your annual required minimum distribution (RMD) and generally is not included in your taxable income.
— Debra Greenberg,
director, Retirement and Personal Wealth Solutions,
Bank of America
If you are age 70½ or older, give directly from your IRA
Another way to give to a qualified charity, if you're age 70½ or older, is to give directly from your traditional IRA. (Donations can also be made directly from your Roth IRA and, in limited circumstances, from a SIMPLE IRA or SEP IRA to which no employer contributions are being made.)
You generally can donate as much as $100,000 directly from your traditional IRA to a qualified charity without being taxed on that distribution. It's worth noting, that because you are not taxed on a qualified charitable distribution, you cannot claim the donation as a tax deduction and contributions to donor-advised funds do not qualify for this tax treatment.
"If you are age 70½ or older, donating money directly from your IRA to a qualified charity can count toward your annual required minimum distribution (RMD) and is generally not included in your taxable income," says Debra Greenberg, director, Retirement and Personal Wealth Solutions, Bank of America.
This method allows you to give more efficiently than if you simply took the IRA distribution yourself, paid taxes on it and then donated whatever you were left with, Greenberg says. But be aware that qualified charitable distributions made directly from your IRA are not tax deductible when you file your federal income tax return. You should discuss this strategy with your tax advisor.

Giving to family and friends

Giving isn't limited to charitable organizations. You may also want to give closer to home — to your children, grandchildren or other family members and loved ones.
Give tax-free gifts
In 2020, you can make a gift of up to $15,000 (or $30,000 if you're giving as a married couple electing to split gifts) per calendar year to anyone you choose, including giving your kids an early inheritance, and neither you nor the recipient will have to pay any federal tax on the gift or use any of your lifetime gift exemption. Any gift above that threshold could be subject to gift taxes or will use a portion of your lifetime gift exemption. So be sure to check with a tax professional before exceeding the maximum amounts.
Regardless of the size of your estate, you can give unlimited amounts toward a loved one's education or medical care without worrying about the gift tax — but only if you give the money directly to the school or health care provider.
Support a child's education with a 529 plan
Another way to give to a child, grandchild or a student of any age is to set aside money in a 529 plan. "These gifts are covered by the same gift tax rules as a cash gift," says Richard J. Polimeni, head of Education Savings Programs, Bank of America. But it should be noted that contributions to a 529 plan count toward the annual tax-free gift limit for that beneficiary. Both 529 plan and non-529 plan gifts count toward the 2020 single $15,000 (or $30,000 if you're giving as a married couple electing to split gifts) gift-tax limit.
529 plans also offer other benefits:
  • Any earnings have the potential to grow free from federal (and in most cases state and local) taxes
  • Distributions, including any earnings, used for qualified higher education expenses are free from federal (and often state and/or local) income taxes.Footnote 2 You can also use up to $10,000 per calendar year per beneficiary to help pay for tuition at an elementary or secondary public, private or religious school. State tax treatment may vary.Footnote 2,3
  • You can make five years of contributions per beneficiary all at once — $75,000, or $150,000 per married couple electing to spilt gifts in 2020 — without using any of your lifetime gift exemption. Anything more than that over the same five-year period could trigger the federal gift tax or use a portion of your lifetime gift exemption.Footnote 1,2,3
  • You remain in control of the account and can even change beneficiaries
When you give to a charitable organization or a loved one, it's important to carefully consider the recipient and the amount you choose to give. Consult with a tax advisor as you consider your options in order to maximize the benefit to the beneficiary and yourself.
Consider how you might enhance the satisfaction of your generosity by giving in a way that delivers the greatest benefit to everybody.
Next steps

Before you invest in a Section 529 plan, request the plan's official statement and read it carefully. The official statement contains more complete information, including investment objectives, charges, expenses and risks of investing in the 529 plan, which you should consider carefully before investing. You should also consider whether your home state or your designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds and protection against creditors that are available only for investments in such state's 529 plan. Section 529 plans are not guaranteed by any state or federal agency.

Footnote 1 Contributions during 2020 between $15,000 and $75,000 ($30,000 and $150,000 for married couples electing to split gifts) made in one year can be prorated over a five-year period without subjecting you to federal gift tax or using your unified gift and estate exemption. If you contribute less than the $75,000 ($150,000 for married couples electing to split gifts) maximum, additional contributions can be made without you being subject to federal gift tax or using a portion of your lifetime gift exemption, up to a prorated level of $15,000 ($30,000 for married couples electing to split gifts) per year per beneficiary. Federal gift taxation or use of your lifetime gift exemption may result if a contribution exceeds the available annual gift tax exclusion amount remaining for a given beneficiary in the year of contribution. For contributions between $15,000 and $75,000 ($30,000 and $150,000 for married couples electing to split gifts) made in one year, if the account owner dies before the end of the five-year period, a prorated portion of the contribution may be included in his or her taxable estate for federal estate tax purposes.

Footnote 2 To be eligible for the favorable tax treatment afforded to any earnings portions of withdrawals from Section 529 accounts, withdrawals must be used for "qualified higher education expenses," as defined in the Internal Revenue Code. For distributions after December 31, 2017, qualified higher education expenses include tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school. These distributions are limited to $10,000 per calendar year, across all 529 accounts for the same beneficiary. State tax treatment may vary.

Footnote 3 Section 529 plans are established by various states and are offered to residents of all states. Depending on the laws of the customer's home state, favorable tax treatment for investing in a Section 529 plan may be limited to investments made in a Section 529 plan offered by the customer's home state. Neither Merrill Lynch, Pierce, Fenner & Smith Incorporated nor any of its subsidiaries are tax or legal advisors. We suggest you consult your personal tax or legal advisor before making tax or legal-related investment decisions.

Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
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