2021 Year End Planning Strategies
With the end of 2021 rapidly approaching, here are some planning strategies to keep in mind.
Annual Gift Tax Exclusion
While a lot of time this year may have been spent discussing large gifts, don’t ignore the cumulative benefit of smaller annual exclusion gifts. In 2021, the annual gift tax exclusion amount allows each person to give away up to $15,000 per person per year. The gifts can be in cash or in kind. This amount can be given to as many people as you want in a given year. A husband and wife jointly can give up to $30,000 per person per year. Gifts of appreciating property are the best. In order to count, the gifts must be of a present and immediate interest. Gifts of a “future interest” do not qualify for the exclusion. The amount is cumulative and includes all gifts given to an individual during the year. Thus paying a $4,000 debt, giving a birthday present worth $1,000 and then a year-end cash gift of $15,000 would mean total gifts of $20,000. A gift in excess of the annual exclusion will require the filing of a gift tax return and the use of a portion of the Lifetime Gift Tax Exemption.
Lifetime Gift Tax Exemption
The Lifetime Gift Tax Exemption is the amount of non-charitable gifts a person can give away over his/her lifetime without paying a gift tax. These gifts will also reduce the amount of available Estate Tax Exemption at death. The Lifetime Gift Tax Exemption for 2021 is $11.7 million. Normally that amount increases each year, but it is still possible the amount will decrease in 2022. Certainly it is scheduled to decrease in 2026. In certain instances it can make great sense to use some or all of your Lifetime Gift Tax Exemption to avoid future appreciation of an asset. It is important to remember, that lifetime gifting transfers the giver’s tax basis in the asset as well and as a result such transfers will not receive a stepped-up income tax basis at death.
Gifts for Medical and Educational Expenses
Gifts for medical and educational expenses are not subject to the gift tax so long as payment is made directly to the medical or educational institution. In order for an educational organization to qualify, it must be “one that normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on.” In addition, to qualify for the Educational Exclusion, the payment can only be for tuition. Payments for books, supplies, room and board, etc. do not qualify.
Medical expenses must be paid directly to the provider and must be for medical care that is deductible for income tax purposes. The Medical Exclusion does not apply to amounts that are reimbursed by the recipient’s insurance.
529 Plans
Another great gifting opportunity is presented by 529 College Savings Plans. Contributions to these plans qualify for the annual gift tax exclusion. Gifts in excess of $15,000 would normally require use of part of the lifetime exemption. However, an individual may contribute as much as $75,000 to a 529 plan in 2021 if they treat the contribution as if it were spread over a 5-year period. This must be reported on A gift tax return for each of the five years. This is often called 5-year gift tax averaging or superfunding. This allows an individual to shelter a large amount of assets from estate taxes, while retaining control of the funds in the 529 account.
ABLE Accounts
An ABLE account is a program administered at the state level to provide a savings vehicle for people with disabilities. Income earned is generally tax-free or at least tax-deferred, and accounts will not cause a disabled person to lose eligibility for means-tested benefits such as Medicaid and Social Security insurance. Contributions to an ABLE account can be made by anyone, including the owner of the account, but are limited to an aggregate yearly contribution amount equal to the annual gift tax exclusion.
Gifts to Charities
Gifts to charity are always a great tax planning option. For those over 70 ½ direct distributions from an IRA to a qualified charity will not be added to gross income and will count toward any required minimum distribution.
A couple of charitable tax benefits will expire on December 31. Ordinarily, individuals who elect to take the standard deduction cannot claim a deduction for their charitable contributions. The law now permits these individuals to claim a limited deduction on their 2021 federal income tax returns for cash contributions made to certain qualifying charitable organizations. Individuals, including married individuals filing separate returns, can claim a deduction of up to $300 for cash contributions made to qualifying charities during 2021. The maximum deduction is increased to $600 for married individuals filing joint returns.
Individuals who itemize may generally claim a deduction for charitable contributions made to qualifying charitable organizations. These limits typically range from 20% to 60% of adjusted gross income (AGI) and vary by the type of contribution and type of charitable organization. Excess contributions may be carried forward for up to five tax years. For 2021 the limit is increased to up to 100% of their AGI.
For both of these 2021 opportunities, cash contributions to most charitable organizations qualify, but, cash contributions made either to supporting organizations or to establish or maintain a donor advised fund, do not. Nor do cash contributions to private foundations and most cash contributions to charitable remainder trusts.
As you consider the need for year-end gifting and the prospective beneficiaries of your generosity, be wise in your approach. Excess gifts could result in tax liabilities, ill-considered gifts may not provide as much tax benefit, and gifts to irresponsible parties may be squandered. Lifetime and charitable gifting can be an important and valuable part of any estate planning strategy if properly planned and followed through.
This post is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Nothing herein creates an attorney-client relationship between Hallock & Hallock and the reader.