End-of-year gifting can be a strategic component of your financial plan, as it can help you manage your wealth efficiently, reduce your taxable income, and provide financial support to loved ones. Here are some beneficial end-of-year gifting strategies to consider:

  • Annual Gift Tax Exclusion: Each year, you can give up to a certain amount (the annual exclusion limit) to an individual without incurring gift tax. In 2023, the annual exclusion limit is $17,000 per person. If you’re married, you and your spouse can make combined gifts of $34,000 to a particular individual. This is a simple strategy for gifting to family and reducing the size of your taxable estate. In 2023, estates of more than $12,920,000 ($25,840,000 for married couples) will pay up to a 40% federal estate and gift tax on bequests (not given to qualifying charities) exceeding those limits. Additional inheritance taxes may apply depending on your state of residency.
  • Paying for Education: Consider contributing to a 529 college savings plan for a child or grandchild. Contributions to 529 plans may provide state tax deductions or credits, and withdrawals for qualified educational expenses are generally tax-free. You may front-load a 529 college savings plan by giving 5 years’ worth of annual gifts of $17,000 at once, for a total of up to $85,000 per person, per beneficiary without paying a gift-tax or chipping away at the lifetime gift & estate tax exclusion. 
  • “Med-Ed” Exemption for Medical, Healthcare and Education Expenses: Direct payments for someone’s educational or medical expenses are exempt from the federal gift tax, without regard to the annual exclusion limitation. For medical expenses, the payment must be made directly to the health care provider or to a company that provides medical insurance. A payment to a school must be made directly (this includes colleges, universities, nursery schools, private grade schools, or private high schools). The payment must be for tuition only, and it can’t cover room and board or books. 
  • Spousal Gifts: Gifts to your spouse who is a U.S. citizen are generally not subject to gift or estate tax. The unlimited marital deduction allows you to transfer an unrestricted amount of assets to your spouse at any time, including at your death, free from tax.
  • Charitable Donations: Making charitable contributions at the end of the year can reduce your taxable income. You can donate cash, appreciated securities (stocks, bonds, or other securities), or tangible personal property (artwork, jewelry, antiques, etc.). Many people gift appreciated securities to charities since you can deduct the fair market value of the securities, while the charity can sell them without incurring any capital gains taxes. If gifting securities or property other than cash, start the discussion with the charity as early as possible, as some smaller charities may take time to execute your gift appropriately.
  • Donor Advised Funds (DAF): If year-end timing of your charitable gifts is a regular concern for you, consider opening a Donor Advised Fund. With a DAF, you can make one gift to the Fund by year-end, then advise on distributions to various other charities at your own pace. This allows you to make an irrevocable charitable contribution, which is eligible for a tax deduction in the current tax year, thus, separating the timing of your gift for tax purposes from the decision about where and when to give.
  • Qualified Charitable Distributions (QCDs): If you are 70½ or older, you can make tax-free distributions from your Individual Retirement Account (IRA) to qualified charities. This QCD can also serve to meet all or part of your annual required minimum distribution (RMD), which would otherwise be taxed as ordinary income. The QCD is a nontaxable distribution made directly by the Trustee of your IRA (other than an ongoing SEP or SIMPLE IRA) to a qualified charitable organization. The annual limit for QCDs is $100,000 per person.
  • Review and Update Your Estate Plan: End-of-year gifting can also be an opportunity to review and update your estate plan. It is important to ensure that your wills, trusts, and beneficiary designations are up to date and align with your financial goals.

Given the complexity of tax laws and the potential implications of gifting on your financial plan, it’s advisable to consult a financial advisor or tax professional regarding these strategies. Eagle Ridge regularly helps our clients navigate gifting rules and implement tax-efficient gifting strategies. These regulations and limitations are updated frequently, sometimes annually, so it is essential to monitor your plan for any changes that affect your unique financial circumstances.