December 22, 2022

The Tax Implications of Gift-Getting and Gift-Giving, Ep #129

24 minutes

How do you gift money to individuals without getting hit with having to pay taxes on the gift? How do you make withdrawals if you’re gifted a beneficiary IRA? What is the most tax-efficient way to carry out charitable giving? These are just a few of the questions that I’ll answer in this special end-of-the-year episode of the Retirement Made Easy podcast!

You will want to hear this episode if you are interested in...

[1:26] Submit questions at RetirementMadeEasyPodcast.com
[2:19] Why pension lump sums are declining
[6:50] Gifting money to individual people
[14:36] Example #1: The Mega Backdoor Roth
[16:48] Example #2: Withdrawing from a beneficiary IRA
[18:57] Example #3: Giving with donor-advised funds (DAF)

Gifting money to individual people

I’ve heard many people say they don’t want to gift someone money because they’ll have to pay taxes on it (or because the gift receiver will have to). That doesn’t have to be the case! If you wanted to give a friend or family member money, the annual individual limit is $16,000 for 2022.

So a married couple can each give $16,000 to one individual, totaling $32,000. You can certainly gift more, but $16,000 is the annual limit you can give one individual without filling out a gift tax form that gets filed with your taxes. Many people gift up to that amount so they can avoid paying taxes.

There’s also something called a lifetime gift exemption. That means you can gift someone a maximum lifetime amount of $12,060,000 to another person. The gift form helps you keep an account of what you’ve gifted someone over your lifetime. What can’t you gift? What happens if you loan someone money they don’t pay back? Listen to find out!

Withdrawing from a beneficiary IRA

I worked with a couple where the wife inherited her mother’s IRA. Because it’s an inherited IRA, she has 10 years to take withdrawals from that IRA and pay the taxes on them. She thought that she’d just do Roth conversions and move the money into her own IRA. Unfortunately, we can’t do that. So what can we do?

We can put more of her earned income into her traditional and Roth 401k. The tax deduction she gets for contributing to her Roth IRA offsets the taxes she has to pay on the withdrawals from her inherited IRA. We wanted her to stay in the 12% tax bracket, so we very carefully balanced her income levels.

Giving with donor-advised funds (DAF)

A charitable couple had inherited a lot of cash, stocks, real estate, etc. They wanted to find a way to continue their charitable giving without having to pay excess taxes. We recommended that this couple look at their appreciated stock. If they cashed out the stock that was up in value, they’d pay long-term capital gains, taxed at 20%. Instead of giving cash to charities, we recommended they take that money and use it to fund a donor-advised fund. How would that help them?

They’d see a tax deduction for charitable giving as well as call the shots on how that money was given over the next chunk of years. In that way, they’d also avoid paying the capital gains on the appreciated stock. If you’re already planning on charitable giving, I’m a huge fan of donor-advised funds. The money continues to grow and all of the tax-free growth can be gifted.

Resources & People Mentioned