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
  • The amount you can gift without having to pay the federal gift tax can change each year, so be sure to check with a tax professional before exceeding the maximum amounts
  • You can contribute five years' worth of annual exclusion gifts at one time to a 529 plan without incurring a federal 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 also could 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 charity:
  • 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 fair market 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, federal income tax-free
  • You could potentially deduct the full $1,000 value of your donation on your income 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 make recommendations to the organization operating the fund 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 have to 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.
You generally can donate as much as $100,000 per year directly from your traditional IRAs on an aggregate basis to a qualified charity without being subject to federal income tax 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 supporting organizations and donor-advised funds do not qualify for this tax treatment. (Qualified charitable distributions also can be made in certain limited circumstances directly from your Roth IRA and from a SIMPLE IRA or SEP IRA to which no employer contributions are being made for the applicable year.) Tax deductible IRA contributions after age 70½ may reduce the amount you are able to exclude from your income as a qualified charitable distribution.
"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. If you are taking RMDs, a qualified charitable distribution up to the $100,000 annual cap can count toward your current year's RMD as long as certain conditions are met. The RMD rules require benefits to commence by age 72 (or 70½ if you reached age 70½ before January 1, 2020). You may defer your first RMD until your required beginning date which is April 1st in the year after you turn age 72 (or 70½, as applicable), but then you'd be required to take two distributions in that year. Failure to take all or part of an RMD results in a 50% excise tax on the shortfall between the actual amount distributed and the RMD amount. Consult your tax advisor for more information on your personal circumstances. State and local taxation of a qualified charitable distribution may vary.

Giving to family and friends

Giving isn't limited to charitable organizations. You also may want to give closer to home — to your children, grandchildren or other family members and loved ones.
Give tax-free gifts
The amount you can gift can change each year — and this includes 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 federal gift tax exemption. Any gift above that threshold could be subject to gift taxes or will use a portion of your lifetime federal gift tax 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 even a nonrelative 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. For the most current limits, visit irs.gov.
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
  • In addition to using the assets for college and technical school expenses, among other education related expenses, up to $10,000 per calendar year per beneficiary can be used for eligible elementary or secondary public, private or religious school tuition, or expenses for a registered and certified apprenticeship program. State tax treatment may vary.Footnote 2,3
  • You can make five years of contributions per beneficiary all at once — without using any of your lifetime federal gift tax exemption. Anything more than that to the same beneficiary over the same five-year period could trigger the federal gift tax or use a portion of your lifetime federal gift tax 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 also should 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 2022 between $16,000 and $80,000 ($32,000 and $160,000 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 federal gift and estate tax exemption. If you contribute less than the $80,000 ($160,000 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 federal gift tax exemption, up to a prorated level of $16,000 ($32,000 for married couples electing to split gifts) per year per beneficiary. Federal gift taxation or use of your lifetime federal gift tax 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 $16,000 and $80,000 ($32,000 and $160,000 for married couples electing to split gifts) made in one year in which an election to prorate the gifts over five years has been made, 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 favorable tax treatment afforded to the earnings portion of a withdrawal from a section 529 account, such withdrawal must be used for "qualified higher education expenses," as defined in the Internal Revenue Code. The earnings portion of a withdraw that is not used for such expenses is subject to federal income tax and may be subject to a 10% additional federal tax, as well as applicable state and local income taxes. The additional tax is waived under certain circumstances. The beneficiary must be attending an eligible educational institution at least half time for room and board expenses to be considered a qualified higher education expense, subject to limitations. Institutions must be eligible to participate in federal student financial aid programs. Some foreign institutions are eligible. You also can take a federal income tax-free distribution from a 529 account of up to $10,000 per calendar year per beneficiary from all 529 accounts to help pay for tuition at an eligible elementary or secondary public, private or religious school. Qualified higher education expenses now include expenses for fees, books, supplies, and equipment required for the participation of a designated beneficiary in an apprenticeship program registered and certified with the Secretary of Labor under the National Apprenticeship Act and amounts paid as principal or interest on any qualified education loans of the designated beneficiary and each sibling of the designated beneficiary, up to a lifetime maximum of $10,000 per individual. Distributions with respect to the loans of a sibling of the designated beneficiary will count towards the lifetime limit of the sibling, not the designated beneficiary. Such repayments may impact student loan interest deductibility. State tax treatment may vary for distributions to pay for tuition in connection with enrollment or attendance at an eligible elementary or secondary public, private or religious school, apprenticeship expenses, and payment of qualified education loans.

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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