Strategic giving: A quick holiday guide

During the holiday season, we focus on giving presents, experiences, and events to those we love the most. But, how often do we think about giving from a tax or estate perspective?

We might associate financial giving with strictly financial–even selfish motives–that only serve to benefit the donor more than the donee. At best, sometimes we may feel uncomfortable taking a financial donation because the giver’s intentions are in the wrong places.

To help you make the most informed and ethical financial choices this season, we’ve decided to fill you in on strategic giving–one of the best ways to plan for the future.

As defined by the Internal Revenue Service, a gift is, “Any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money's worth) is not received in return.”

In Canada, the definition of a gift is a bit more challenging to define. The Canada Revenue Agency states that a gift must be given freely, and without any contractual obligation(s) involved. Generally speaking, a gift is also considered a transfer of property without consideration.

Aside from the joy a gift brings (both to the giver and the receiver), choosing to give also confers taxable benefits for both parties. For one, depending on the amount given, neither party will be subject to any gift tax.

Some gifts have no taxable status whatsoever, but more on that below. Second, certain charitable donations can be deducted from your federal tax return, thus reducing your income for that period.

To be as clear as possible, it is also crucial to understand what consideration is. Consideration is simply the giving of an asset–liquid or not–in exchange for something of value.

This is important to keep in mind when it comes to gifting assets, as it may be tempting to think that you can trade assets without engaging tax consequences. Let’s say you gave your daughter a car for Christmas and in return, she gave you a plane ticket. Because assets were exchanged to gain something of value, these transactions cannot be considered gifts.

Acting purposefully with your financial gifts can lead to having more funds in the pocket of the receiver, rather than losing a large portion of it to taxes. The intention behind the giving act is important, but so is choosing what assets to donate.

Keeping in mind the definition of a gift as defined above, nearly every gift is assumed to be a taxable disposition. But, there are some exceptions. Here are a few.

Gifts to a spouse

Gifts to your spouse are a type of present that is non-taxable for both parties. This allows the donor to know that all of the money they wish their spouse to receive will be theirs–not belonging to the government as well.

Gifts within annual deduction amounts

In the U.S., as long as your total amount of gifting falls under a certain amount, it is also considered to be tax-exempt. In 2022, the current amount that you can give without accruing tax is $16,000. In 2023 it will be increased to $17,000.

In the case of a joint gift, the amount is doubled per donor. For example, if you and your partner decide to give $32,000 jointly to a friend in need, both of your annual deduction amounts apply to the transaction. Thus you fall within the tax-exempt bracket.

If the amount you can give without triggering tax seems too small, there is an additional option if you plan to exceed it. Once you do so, you will need to report your gift to be deducted from your Lifetime Exclusion Amount–using Form 709. This amount is the sum of all the gifts you can give during your lifetime, without being taxed. In 2022 this amount is just over 12.06 million.

Keep in mind, however, that this amount also applies to your estate. If you access this amount with giving during your lifetime, it will reduce the amount your estate can be worth before triggering estate tax. Here’s an example to clear up any confusion:

Let’s say you choose to give your home (valued at one million dollars) to a family member that is not your spouse. If you pass away, and your estate is valued at 12.06 million, you will be taxed on the remaining 1.06 million that spills over that bracket.

Gifts given to a political organization

A third way you can avoid taxes on your giving entirely is by donating gifts to a political organization for its use. Any funds given for the organization to use on its terms will be exempt from any gift tax.

Planning in Action: Looking for an example of this in action? Check out our press release on Patagonia’s trust transaction.

Similar to giving to a charitable organization during your lifetime, legacy giving (also known as planned giving) is a final way to altruistically distribute your assets–after your passing. Gifts set to occur after your passing are typically laid out in your estate plan or will (or an enhanced life estate deed) and are a respectable option to avoid estate taxes.

Legacy giving is possibly one of the most effective giving methods for charities and organizations, as it allows these groups to receive a large number of assets otherwise not available through traditional funding methods. Donating via your will allows for more flexibility in the amount you can give without adverse tax consequences. Consequently, this leads to more funds in the hands of people that strive to make a difference in our world.

Looking for more gifting ideas?

Interested in giving a substantial amount this holiday season, or adjusting your will to include an organization? Our estate experts can help. We pride ourselves on a robust team of accountants, estate professionals, and other staff to provide strategic solutions with lasting results. Book a free consultation with us today. We would love to get in touch.