December is the most wonderful time of the year. The birth of Christ, the celebration of the miraculous, family, lights, warm sweaters, hot cocoa, and of course GIVING, make it a month like no other.  It is also the eve of tax season when many of us are feeling the dread of the day of reckoning and wondering if there is anything we can do to put our money to better use than to the government.  The antidote to tax dread may be found in the spirit of the season itself.  Giving is both a great way to make sure that this month is the best month of the year while soothing your tax anxiety.

As a tax adviser one of the things I like most about giving as a tax strategy is that almost every taxpayer, no matter their income, can benefit in some way from a giving strategy.  Giving can be quite simple or can be very sophisticated, it can reduce tax on the margin or wipe out huge chunks of tax liability.  However you do it, it is worth taking a little time to consider your options.

Before you get started, you should understand some basics.

1. The only type of giving that will reduce YOUR income tax liability is giving to qualified charitable organizations.  Before you make this kind of gift you should ensure that the organization you give to qualifies. You can check that here: www.irs.gov/Charities-&-Non-Profits/Exempt-Organizations-Select-Check

2.Giving to anyone or anything other than a qualified charitable organization could trigger gift tax which is a tax that the giver pays on the value of gifts given.  It is not income tax.  But this doesn’t mean that giving to your niece isn’t beneficial, I will cover that shortly.

3.Gifts that you receive are exempt from income tax. You get to keep it all.

Since most of the gifts that you will be giving this month will not be to qualified charitable organizations, let’s talk about those gifts first.  Why haven’t you been paying gift tax on all the gifts you have given at Christmas for the past 40 years? Simply because the law allows each of us to give up to $14,000 to any person each year before our gift is subject to gift tax. In addition, gifts to your spouse are completely exempt from gift tax so go ahead and buy her that new Mercedes or him that new Razor and don’t worry about it.  Additionally, if you are married and you give your daughter a $25,000 car you can split the gift between you and your spouse, each effectively giving a $12,500 gift and therefore making the gifts exempt from gift tax.

In my opinion, one of the greatest gifts a parent, grandparent, aunt, or uncle can make is a Roth IRA contribution.  For a working child or teen, you can contribute up to the lesser of the child’s 2016 earnings or $5,500. For a 16 year old that $5,500 contribution will be worth $180,000 when they are 66 years old assuming an interest rate of 7%. In addition, 100% of that money will be tax free at retirement and if the child needs $10,000 to help them purchase a first home they can withdraw it tax free as well.  A Roth IRA or a qualified college savings vehicle can also be used to put away money for a child’s education.

Gifting assets to a child can save tax by shifting the income from those assets from a parent or other taxpayer in a high tax bracket to the child who is in a low tax bracket.  This benefit is limited because of the Kiddie Tax, however assets held for long term appreciation may avoid Kiddie Tax.  This is a good item to discuss with your tax professional and plan carefully.

Making tax deductible gifts to qualified charitable organizations provides the biggest potential tax savings for you and the ways to do it are numerous. If you are already making charitable contributions, just by changing how those donations are made can squeeze additional tax savings out of the same dollars.  For instance, if you are over 70.5 years old you can make your charitable contributions directly from your IRA.  This keeps the income in your IRA off of your tax return and by doing so it potentially increases the value of other deductions that you are already taking.  Another way to squeeze more out of the same is to donate appreciated capital gain property instead of cash.  This is one of the few strategies available that allows you to legally “double-dip.”  Here you don’t recognize the gain on your appreciated property as income AND you get to deduct the fair market value of the assets you gift. What a way to tithe or support that charity that you have been sending an annual contribution to.

Do you own land, and would you like your grandkids to enjoy the same open vistas and sunsets that you have enjoyed? Consider a qualified conservation easement.  In this way you potentially harvest a large current tax deduction and save that view as part of your legacy.

Like a qualified conservation easement there are many advanced gifting strategies that must be tailored to the individual.  What is required is an asset and the desire to give.  Even if you still need the income from an asset, you might be able to generate a large current tax deduction while securing the future income for your use.  Some parents hesitate to give too much to charity for fear of not leaving enough to posterity,  there are ways to secure both objectives and reduce your tax bill to boot. Do yourself a favor and talk to me, you might be surprised at how merry this December can be.

Ben Smith, MTAX, CPA

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