The Weekly Insight: Feeling Charitable? Graphic

The Weekly Insight Podcast – Feeling Charitable?

It is hard to believe it is already December! What a year it has been. In many ways, it seems like it has all gone so quickly. In others? Can you believe it has only been seven months since the market was down over 20%?

As we drive into the end of the year, we wanted to take a moment to step away from market commentary to focus instead on what savvy investors should be thinking about as the year ends. Deadlines are approaching for some very worthwhile strategies, and it is worth taking a quick dive into a few highlights to see if they may apply to you. We highly recommend you reach out soon to discuss if you have any questions or think these strategies may be appropriate for your situation.

Tax Loss Harvesting

This is the easy one – but an important discussion to have. Tax loss harvesting is the strategy of selling assets that have lost value to either offset other gains in the portfolio or to benefit your larger tax planning strategy. At Insight, we are looking at this across our portfolios every year – especially as the year-end nears.

The bad news right now is…there are not many losses in portfolios to take. Actually, that’s the good news! But it does make executing on this strategy difficult.  We will do the best we can – but if you have other outside losses you are thinking about taking, please let us know so we can understand the impacts on your broader portfolio. The deadline for this is to have sales executed by market close on December 31st.

Charitable Giving – Changes Are Coming!

Charitable gifting has been a long-utilized strategy for investors. Be it donating shares of highly appreciated stock, utilizing Qualified Charitable Distributions (QCDs) from IRAs, starting Donor Advised Funds (DAFs) or simply writing checks to your favorite charity, all can benefit causes you care about and reduce your tax bill.

But it turns out – especially for high income earners – this may be an important year to front load charitable contributions because the rules are changing. The One Big Beautiful Bill (OBBB) made significant changes to how charitable contributions work, but they are not implemented until 2026, meaning 2025 will be the last year to take advantage of the old rules.  Let’s look at the changes:

  1. New “above-the-line” deductions for those that do not itemize.
    1. For those that take the standard deduction, you can now get a modest deduction ($1,000 for single filters, $2,000 for married couples filing jointly) without itemizing.
  2. New floor on itemized charitable deductions
    1. For those who do itemize, the rule changes are not as good. The OBBB introduced a floor for charitable deductions of 0.50% of adjusted gross income (AGI).
    2. Let’s look at an example. Jim & Sally have $500,000 in AGI and annually gift $20,000 to their church. Their blended tax rate is 22.50%.
      1. Under the old rules, they would be able to deduct the entire $20,000 from their income. This would result in tax savings of $4,500.
      2. Under the new rules, the first 0.50% of AGI is not deductible. For Jim & Sally, that is $2,500. That means they can only deduct $17,500 from their gift to the church. Their tax savings now drop to $3,937.50. This rule change costs them more than $560 in tax savings.
  3. New “cap” on deduction value for top-bracket taxpayers
    1. For taxpayers in the top tax bracket (37%), charitable deductions will be capped at 35% of the amount donated. 
    2. If a taxpayer in the top bracket donated $100,000 in years past, they would have received $37,000 in tax savings. Under the new rules, their savings will only be $35,000 (35% of $100,000).

All these rules kick in for next year. Which means – in some situations – it may make sense to frontload charitable donations to 2025 as the benefits for high earners are greater this year than they will be in the future.

This is where tools like Donor Advised Funds (DAFs) can come into play. You can make a large charitable contribution this year – to your own fund – but delay payments to charities until you are prepared to do so. A DAF gives you tax benefits now, the ability to grow the donated assets in the market, and the ability to direct gifts in the future. This strategy is particularly effective for gifts of highly appreciated stock.

Insight has several DAF tools available to us. If you are interested in this strategy, please let us know ASAP as it takes time to set one up.

Gifting to Family

One of the benefits of the OBBB was that it made the higher estate and gift tax exemptions permanent (at least until the next change!). And that permanent level is high enough that not many investors are going to need to be concerned with it ($15 million for single/$30 million for married couples).

But that does not necessarily mean our clients want to wait until they die to begin sharing their prosperity with their children, family, friends, etc. And the end of the year is an excellent time to consider this. And there are many tax efficient ways to do so.

Annual Gift Exclusion

This is the “easy” one. You can give any person $18,000 this year without any tax or reporting consequences. Next year that number goes up to $19,000. It is very important to note this is an “individual” limit. 

Let’s say, for example, a couple really want to help their daughter and son-in-law who are starting out in life and looking to buy a new home. This is a wonderful time of year to pass assets to them, make a meaningful gift around the holidays, and have no IRS reporting. Here’s how:

  1. On New Years Eve, the couple writes the following checks and gives them to the kids:
    1. Check from husband to daughter:  $18,000
    2. Check from wife to daughter: $18,000
    3. Check from husband to son-in-law: $18,000
    4. Check from wife to son-in-law: $18,000
  2. On New Year’s Day, repeat that process with the new $19,000 exemption.

You have now easily provided a gift of nearly $150,000 with no tax consequences.

Gifting Appreciated Stock

This is typically considered more of a charitable giving strategy, but it can also be used for personal gifts. In this scenario, an investor who would sit in a high-income tax bracket – and the highest capital gains bracket – would gift highly appreciated stock to a younger/lower income individual. Yes, the receiver of the gift does get the giver’s tax basis. But when they sell the stock, they will be paying significantly less tax than the donor would.

529 Plans

In states like Iowa – whose income tax rates are falling – the tax benefits of a 529 plan are slipping away. But that does not mean they can’t still be a great tool to efficiently get money out of your estate and to your loved ones.

Much like a gift of cash, you can put $18,000 per person into a 529 this year. But the IRS also allows you to do a block transfer worth 5 years of exemptions in one year. That would allow for a $90,000 transfer per person – and per spouse. Theoretically, if you are gifting money to a kid or grandchild for college expenses, a married couple could move $180,000 this year – tax and reporting free.

The 2017 Tax Cut and Jobs Act made this transfer slightly more appealing. Not only is this a tax-free transfer, the beneficiary can now move up to $30,000 of the gift to a Roth IRA if they do not use it for qualifying educational expenses. Meaning it can be a nice nest egg for retirement as well.

It can sometimes seem as if all the vagaries of the tax code are impenetrable when it comes to this type of year end planning.  That’s exactly what we are here for. If you would like to discuss these – or the countless others we haven’t mentioned – make sure you give us a call as soon as possible. The year is ticking away!

Sincerely, 

Insight Wealth Group

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