February 14, 2024 - The IRS may not be the first thing you think of on Valentine’s Day, but as Americans exchange flowers and heartfelt messages, the IRS has given us some gifts of its own. Improved regulations that benefit both charitable donors and charities are worth celebrating, so today we’re looking at the 2024 tax and charitable giving updates that may benefit you, those you love, and the charities that are close to your heart.

GIFTS TO OTHERS

If you plan to give any substantial gifts this Valentine’s Day, you should know the IRS imposes a federal gift tax on gifts of money or assets to others, which is typically paid by the giver. The annual gift tax exclusion is the maximum amount you can give a single person per year without having to file a gift tax return with the IRS. If you exceed this exclusion amount, you must report the gift to the IRS, and the excess amount of your gift is added to your lifetime gift and estate tax exemption. The total of gifts given during your lifetime and upon your death that exceed the federal gift and estate tax exemption will be subject to up to a 40% federal estate tax.

Of course, some gifts are excluded from the unified gift and estate tax. These include gifts to qualified charities and to your spouse. And remember that you can give gifts of up to the annual gift tax exclusion amount without these gifts counting against your lifetime exemption. For 2024, the gift tax exclusion amount is $18,000 per person or $36,000 per couple, meaning you can give up to $18,000 to any one person, or up to $18,000 each to multiple people, without incurring any reduction in your available lifetime exemption amount. That’s a lot of chocolate hearts!

The Tax Cuts and Jobs Act of 2017 doubled the lifetime exemption amount from $5 million to $10 million, indexed for inflation. In 2024, the IRS increased the exemption to $13.61 million per person or $27.22 million per married couple filing jointly. If you had already reached the previous year’s threshold of $12.92 million, you now have an additional $690,000 to give away in 2024.

This record-high exemption amount is scheduled to be approximately halved when the Tax Cuts and Jobs Act sunsets on December 31, 2025. However, the IRS has indicated that there will not be clawbacks for most eligible gifts completed before 2026. In other words, no gift taxes will be imposed on gifts made within the higher exemption amount after the exemption is lowered. If you anticipate being impacted by a lowered lifetime gift and estate tax exemption, you should meet with your financial advisor to discuss estate planning strategies to enact in the next two years.

Example

Mr. Jones has an estate of approximately $10 million. He is concerned about exposure to estate tax once the higher exemption amount lowers in 2026 to approximately $6.4 million. After talking to his tax advisor, Mr. Jones decides to start giving each of his children and grandchildren $18,000 a year to reduce his estate value, and he also implements several charitable giving initiatives using appreciated assets to reduce his capital gains tax exposure.

GIFTS TO CHARITY

Charitable Deduction

The federal standard deduction has increased to $14,600 for single filers and $29,200 for married couples filing jointly. An increased standard deduction means fewer people will meet the threshold to itemize. However, charitable bundling is a giving strategy that enables donors to increase their charitable contributions and itemize gifts every few years while taking the standard deduction in other years. This article illustrates how the bundling strategy results in even greater tax savings than just taking the standard deduction each year.

QCD

Qualified charitable distributions provide another way for donors aged 70.5 or older to maximize their charitable impact while using the standard deduction. A qualified charitable distribution (QCD) is a charitable donation made directly from your IRA. In 2024, the limit for this type of gift increased to $105,000 per year. A QCD does not qualify for a charitable tax deduction, but the QCD amount is withheld from your taxable income. Thus, even non-itemizers achieve tax benefits with a QCD.

In 2024, the IRS eliminated required minimum distributions (RMDs) from Roth IRAs. Since Roth IRA distributions are not taxed, there is little incentive to use these accounts for QCDs. However, the IRS still requires taxable distributions from traditional IRAs beginning at age 73, and inherited IRAs are one of the only taxable assets in most estates, making the QCD a tax-efficient strategy for these accounts.

Charitable Gift Annuity

A variation on a QCD debuted in 2023 when the IRS began enabling an IRA donation to a split interest vehicle, like a charitable gift annuity (CGA). In 2024, the maximum amount allowed for this type of donation increased to $53,000 per person. This giving opportunity is currently limited to once per lifetime, and it must be completed in one calendar year. This means that a couple could contribute a maximum of $106,000 from their IRAs to a joint CGA. They would receive an income stream from the CGA for the rest of their lives, and a charity would receive the remainder upon their deaths.

Charitable gift annuities have become an even more attractive giving option over the past year thanks to increased gift annuity rates. The American Council on Gift Annuities (ACGA) issues rates that over 90% of charities use to calculate gift annuity payments. In response to higher interest rates, gift annuity rates increased by approximately 0.4% for 2024. You can view the new rates for your age on the ACGA website.

Example

Ms. Taylor gives $1,000 per month to her church every year. She’s pleased to support the ministry, but her donations don’t reduce her tax bill since her total deductions are less than the standard deduction. At her 71^st birthday party, a friend tells her about how QCDs can provide a more tax-efficient giving strategy. Ms. Taylor begins making donations to her church directly from her IRA, allowing for larger donations since she is using pretax earnings.

Ms. Taylor also realizes that the new QCD-funded CGA may be a tax-efficient way to include the church in her estate planning while receiving an income stream to help her through her retirement years. She transfers $53,000 from her IRA to a CGA. She will receive $3,392 from the annuity each year for the rest of her life, and her church will receive the remainder upon her death. 

GIFTS FOR EDUCATION

The IRS now allows you to roll $35,000 in unused 529 funds to a Roth IRA for the beneficiary of the 529 without incurring tax penalties. Exceptions apply to this rollover, but the new rule, along with 529 beneficiary transfer options and the ability to use these funds for K-12 education in many states, provides some reassurance to family members worried about overfunding 529s.

As we celebrate love on this Valentine's Day, we can also celebrate new regulations that make giving to the people and charities we love even easier. If you'd like to explore how you can give in the most tax-efficient way, call our legal team today at 214.978.3300.