We have some of the best clients you could imagine. We admit to our bias, but it’s well deserved.
We specialize in estate planning that’s designed to protect assets. Clients sometimes ask us about ways to give money to the people and the causes they care about.
One couple related their satisfaction in doing something different this Christmas. Instead of giving gifts to each other, they gave to an organization that provides goats and chickens for people in developing nations. Yes, the joy of generosity is still alive and well.
The Personal Boost of Giving
There’s something personally satisfying about volunteering your time and making financial contributions. Friends affirm the truth of the adage, “It’s better to give than to receive.” Reports from recent years show the science behind the emotional reward of giving.
Interestingly, older adults enjoy a greater sense of satisfaction from giving than younger individuals. According to a 2016 article in Frontiers in Psychology, a Swedish study found that “the level of positive emotional reactions from monetary donations was higher in older participants compared to younger participants.”
A Swiss study researched “the neural link between generosity and happiness.” Brain scans show that our neural pleasure centers are activated when we give and seek the well-being of others.
Certainly, there’s something to be gained by making annual gifts to people and causes that are important to you.
Financial Advantages of Annual Gifting
While the personal satisfaction of helping others is a prime motivator, it’s no secret that financial reward is often in the mix. Normally it has to do with the reduction of a tax bill. Of course, the IRS doesn’t just smile and give us a break on every gift or donation we’d ever want to make.
Even if a tax break isn’t the most important part of your decision, it helps to be in the know.
Not All Donations Qualify
Sending checks to support your favorite not-for-profit? Your donations might not be tax deductible. Surprised? Here’s why: Tax law applies a variety of classifications to not-for-profit organizations. It depends on their mission and organizational structure. The IRS has nearly thirty different 501(c)(x..) types. Only a few of them are qualified to accept tax deductible contributions. Check this list of nonprofit types and their deduction status.
Three Ways to Find the Joy of Giving
Want to discover the joy of annual gifting for yourself? How do tax laws fit in? Even with a reliable list, IRS rules aren’t as straightforward as we might hope for. No surprise there. To offer some simple guidance on the subject we’ve divided the joy of annual gifting into three categories:
- Giving to charitable organizations WITH a tax-deductible benefit
- Giving to not-for-profit organizations WITHOUT a tax-deductible benefit
- Giving to family members without any tax implications
Giving with a tax-deductible benefit
Religious and charitable organizations are usually designated as 501(c)(3). These organizations are qualified to receive tax-deductible donations. Your favorite place of worship is one example. The Wounded Warrior Project is another.
Giving without a tax-deductible benefit
Civic and social welfare organizations that carry a 501(c)(4) designation are a different story. Organizations like AARP and Rolling Thunder enjoy a tax-exempt status, but your donations to those organizations aren’t eligible for deductions from your income taxes.
Exceptions: There are at least two kinds of 501(c)(4) organizations that DO accept tax-deductible donations; volunteer fire departments and veterans’ organizations with membership with at least 90% war veterans.
Giving to family members
The joy of annual gifting can certainly be discovered when giving to family members. There’s no tax advantage for giving large or small amounts to your children. So this introduces different questions.
Will the recipient have a tax burden? This is the question that’s often asked. The answer is straightforward. No, THEY will not have a tax burden.
Will the giver have a tax burden? You might, depending on the size and the year. As with many tax issues, the rules change from time to time. What stays the same is this; it’s the giver that’s responsible for any gift taxes that are owed.
Things change. Estate taxes is a great example. Many of us remember the days when an estate’s tax exemption was around $650,000. Anyone who left assets to heirs of more than that amount could owe estate taxes. The exemption has dramatically changed more than once in recent years. The amount was changed for 2019. For single individuals the exemption is 11.4 million dollars. A married couple can shield 22.8 million dollars.
Gifts to family members present a similar scenario in that the numbers change from time to time. Currently, and scheduled to remain through 2025, any person can make annual gifts of up to $15,000 per person to as many people as they want, without using up their lifetime exemption.
To get more specific, here’s an example: Each year dad can give up to $15,000 to son Joey, and $15,000 to daughter Paula. Mom can then give $15,000 to daughter-in-law Anne, and $15,000 to son-in-law Mark.
About Record Keeping
When it comes to tax-deductible contributions, cancelled checks count as a legitimate record. Nonprofits are also required to provide a receipt for donations of $250 or more in a calendar year. The receipt is typically sent by January 31 of the year following the donations.
Talk to Your Tax Professional
A bit of knowledge with advance planning always works to your advantage.
For most of our clients, giving isn’t just about the tax advantage. It’s about making a worthwhile contribution to an endeavor that’s meaningful to them. Still, we recommend that they talk to a tax professional and ask the following questions:
- Does the deduction matter?
- How much of the gift will be deductible?
- What will be the impact on the tax bill?
- Will there be tax implications for the recipient?
Consider Your Own Future Needs
Planned generosity is great, but do you have your own affairs in order?
We help seniors and their families protect their legal and financial interests. The core of our work relates to estate planning, elder law, long term care planning, special needs, and VA benefits for seniors.
Want to know more about how our solutions can help you and your family? Call us at 636-686-6790.