If you’re inclined to help others, consider these tax-efficient ways to make your giving go further.
Many of us prefer to combine our support for the causes and people we care about with a desire to save on taxes. Fortunately, there are strategies that may help us accomplish both. Whether you want to donate to charity or invest in a loved-one’s future, consider these tax‐smart ways to help make your giving go further.
Consider giving gifts through a 529 education savings plan. Anyone, including grandparents, can contribute up to $16,000 per year ($32,000 for married couples electing to split gifts) to any individual’s 529 plan, without incurring federal gift tax or using the federal lifetime gift tax exemption. Many states offer state income tax deductions to residents who contribute to their own state’s plan, while some states offer tax deductions regardless of which plan you invest in.
Additionally, unique to 529 plans, the federal tax code allows you to front load up to five times the annual gift tax exclusion in a single year.1 Single individuals are therefore able to contribute up to $80,000 per recipient in a single year, while married couples electing to split gifts can contribute up to $160,000 per recipient in a single year. If you have the means, you can even take advantage of six-year gift tax averaging. To do this, you can contribute one year's worth of gifts in December, followed by five years’ worth of contributions in January, effectively making six years’ worth of contributions in just two months.2 Also note that 529 plan account owners may take federal income tax-free 529 plan distributions not only for certain higher education expenses, but also for certain primary and secondary education expenses, apprenticeship expenses and student loan repayments.3
Morgan Stanley offers the Morgan Stanley National Advisory 529 Plan, the first 529 plan of its kind, available nationwide, exclusively to Morgan Stanley clients. You can select from goals-based asset allocation portfolios, guided by Morgan Stanley thought leaders, that align with your unique time frame, risk profile and goals, while gaining access to institutional caliber fund managers and pricing. Speak with your Morgan Stanley Financial Advisor or Private Wealth Advisor and your personal tax and legal advisors to determine whether this strategy might be appropriate for you.
Make financial gifts before year end to help reduce estate taxes. You can gift up to $16,000 ($32,000 for married couples electing to split gifts) per recipient to an unlimited number of individuals per year without incurring a federal gift tax. Note that you can’t carry over unused annual exclusions from one year to the next. The transfers may help your family as a whole pay fewer taxes if you give income-earning property to family members in lower income tax brackets. The $16,000 annual exclusion doesn’t count against the federal gift tax exemption of $12.06 million for individuals or $24.12 million for married couples in 2022.4 It is noteworthy that gifts in the form of tuition payments made directly to an educational organization, as well as medical expense payments made directly to the provider, are not taxable gifts and do not count against your $16,000 annual exclusion for gifts or reduce your federal lifetime gift tax exemption.
Appreciated investments can be donated to qualified charitable organizations, which would allow individuals to take a deduction in the year the donation is made and avoid paying capital gains tax on the appreciation. Note that donating appreciated investments that you have owned for more than a year can allow you to take a larger deduction than donating appreciated investments that have been held for one year or less.5 Additionally, for investments that have losses, it may be prudent to sell the investments first in order to realize the losses and then donate the proceeds of the sale to a qualified charity for an additional tax deduction.
A donor advised fund (DAF) is one option for gifting appreciated investments. A DAF, such as the Morgan Stanley Global Impact Funding Trust (MS GIFT), gives taxpayers a tax-efficient way to donate stock, mutual funds or other assets and claim a federal income tax deduction.6
A Grantor Retained Annuity Trust (GRAT) may allow you to pass the appreciation in the value of assets in the GRAT, in excess of a hurdle rate set by the IRS (the 7520 rate), to your beneficiaries with potentially little to no federal gift tax consequences. Given the low interest rate environment, this may be an even more attractive opportunity. Speak with your tax advisor to see if this strategy may make sense for you.
If you have complex tax planning needs, your Morgan Stanley Financial Advisor can connect you to experienced tax professionals at leading U.S.-based providers across the country to assist.
In addition, Morgan Stanley Financial Advisors offer tax-smart techniques and strategies to help you deepen the impact of your giving and potentially reduce the impact of taxes – all year round – as part of our Total Tax 365 approach. Talk to your Morgan Stanley Financial Advisor to learn more.