Smart ways to give to family and your favorite causes

Whether you want to give to a charity, a family member or a friend, these tax-wise strategies may increase the value of your gift to the recipient — and yourself.

Key points

You can donate appreciated stocks directly to a charitable organization, which may be more tax advantageous than selling them and donating the net proceeds
The amount you can gift without having to pay the federal gift tax can change each year, so be sure to check with a tax professional before exceeding the maximum amounts
You can contribute five years' worth of annual exclusion gifts at one time to a 529 plan without incurring a federal gift taxFootnote ¹
Learn more about donating financial gifts

Sharing your good fortune with others could mean donating money to a charitable organization that aligns with your values. It also could mean helping family and other loved ones with financial gifts. Once you've identified the causes — or people — you'd like to support, the next step is to decide how you want to do it. Beyond simply giving money directly, there are strategies that can help both you and the recipient get the most out of your gift.

Charitable giving

Donate stocks or other assets

If you have appreciated capital assets you've held for more than a year, such as stocks, there may be advantages to donating those directly to the recipient instead of selling them and paying tax first and then donating the net proceeds. By donating appreciated assets directly to a charity:

You allow the organization to receive the full pre-tax value of those appreciated assets
You may avoid long-term capital gains taxes you might otherwise owe
You may be able to deduct the full fair market value of those assets on your tax return as a charitable gift

For example: Suppose you sell $1,000 worth of stock that you've held for more than a year in order to donate the proceeds to a charitable organization. After paying any capital gains taxes, you'd be left with less than $1,000 to give to the charity. But if you were to donate that same $1,000 of appreciated stock directly to the organization:

The organization can usually sell the stock and receive the full $1,000, federal income tax-free
You could potentially deduct the full $1,000 value of your donation on your income tax return

This practice isn't limited to stock investments. It may be worth asking your tax advisor about the possibility of donating other appreciated assets you might own, such as art or real estate.

Open a donor-advised fund

An alternative vehicle for giving money to causes you support is a donor-advised fund. You donate to the fund and then make recommendations to the organization operating the fund as to which qualified charitable organizations you'd like your donations distributed. In the meantime, the money in your account can be invested to potentially grow over time until you decide to make a donation.

Some of the benefits of contributing to a donor-advised fund:

Generally, it allows you to take the tax deduction for any donations you make to it in the year you make the donation
The fund doesn't have to disburse the funds in the year in which you make the donation
You have the ability to contribute appreciated securities to your donor-advised fund
It can simplify your recordkeeping. Rather than keeping receipts from every charity you donate to throughout the year, you need to retain only one year-end statement.

If you're age 73 or older, donating money directly from your IRA to a qualified charity can count toward your annual required minimum distribution (RMD) and generally is not included in your taxable income.

— Kevin O'Neil,
managing director and product management executive,
Personal Retirement Solutions, Investment Solutions Group,
Merrill

If you're age 70½ or older, give directly from your IRA

Another way to give to a qualified charity, if you're age 70½ or older, is to give directly from your traditional IRA.

In 2024, you generally can donate as much as $105,000 directly from your traditional IRAs on an aggregate basis to a qualified charity without being subject to federal income tax on that distribution. This amount will be indexed each year for inflation. It's worth noting, because you are not taxed on a qualified charitable distribution, you cannot claim the donation as a tax deduction. Contributions to supporting organizations and donor-advised funds do not qualify for this tax treatment. In certain limited circumstances, qualified charitable distributions can also be made directly from your Roth IRA and from a SIMPLE IRA or SEP IRA (to which no employer contributions are being made for the applicable year). Tax-deductible IRA contributions after age 70½ may reduce the amount you are able to exclude from your income as a qualified charitable distribution.

"If you're age 73 or older and required to take required minimum distributions (RMDs), donating money directly from your IRA to a qualified charity can count toward your annual RMD and is generally not included in your taxable income," says Kevin O'Neil, managing director and product management executive, Personal Retirement Solutions, Investment Solutions Group, Merrill.

This method allows you to give more efficiently than if you simply took the IRA distribution yourself, paid taxes on it and then donated whatever you were left with, O'Neil says. But be aware that qualified charitable distributions made directly from your IRA are not tax deductible when you file your federal income tax return. If you are taking RMDs, a qualified charitable distribution up to the $105,000 annual cap can count toward your current year's RMD as long as certain conditions are met. You may defer your first RMD until your required beginning date, which is April 1 in the year after you turn age 73, but then you'd be required to take two distributions in that year.Footnote ² Failure to take all or part of an RMD results in additional taxes on the shortfall between the actual amount distributed and the RMD amount.

The ability to make charitable contributions from your IRA has recently expanded. SECURE 2.0 expanded the IRA charitable distribution provision to allow for a one-time distribution to charitable gift annuities, charitable remainder unitrusts and charitable remainder annuity trusts, subject to certain limitations and requirements. The maximum distribution amount under this special rule is $53,000 in 2024 and will also be indexed for inflation each year.

Consult your tax advisor for more information on your personal circumstances. State and local taxation of a qualified charitable distribution may vary.

Giving to family and friends

Giving isn't limited to charitable organizations. You also may want to give closer to home — to your children, grandchildren or other family members and loved ones.

Give tax-free gifts

The amount you can gift can change each year — and this includes giving your kids an early inheritance, and neither you nor the recipient will have to pay any federal tax on the gift or use any of your lifetime federal gift tax exemption. Any gift above that threshold could be subject to federal gift taxes or will use a portion of your lifetime federal gift tax exemption. So be sure to check with a tax professional before exceeding the maximum amounts.

Regardless of the size of your estate, you can give unlimited amounts toward a loved one's education or medical care without worrying about the gift tax — but only if you give the money directly to the school or healthcare provider.

Support a child's education with a 529 plan

Another way to give to a child, grandchild or even a nonrelative of any age is to set aside money in a 529 plan. "These gifts are covered by the same annual gift tax rules as a cash gift," says Richard J. Polimeni, head of Education Savings Programs, Bank of America. But you can make five years of contributions per beneficiary all in one calendar year — without using any of your lifetime federal gift tax exemption. Anything more than that to the same beneficiary over the same five-year period could trigger the federal gift tax or use a portion of your lifetime federal gift tax exemption.Footnote ^1,3,4 For the most current limits, visit irs.gov.

529 plans also offer other benefits:

Any earnings have the potential to grow free from federal (and in most cases state and local) taxes
Distributions, including any earnings, used for qualified higher education expenses are free from federal (and often state and/or local) income taxesFootnote ³
You remain in control of the account and can even change beneficiaries

Also, effective for distributions made on or after January 1, 2024, 529 plan assets can be rolled over to a Roth IRA without federal tax or penalties if the withdrawal meets specific criteria.Footnote ⁵

When you give to a charitable organization or a loved one, it's important to carefully consider the recipient and the amount you choose to give. Consult with a tax advisor as you consider your options to maximize the benefit to the beneficiary and yourself.

Consider how you might enhance the satisfaction of your generosity by giving in a way that delivers the greatest benefit to everybody.

Next steps

Read about how charitable giving could lead to bigger tax savings in the long run
Learn more about 529 plan benefits when saving for education costs
Use the Estate Tax Calculator to see if your estate might be subject to the estate tax

Before you invest in a Section 529 plan, request the plan's official statement and read it carefully. The official statement contains more complete information, including investment objectives, charges, expenses and risks of investing in the 529 plan, which you should consider carefully before investing. You also should consider whether your home state or your designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds and protection against creditors that are available only for investments in such state's 529 plan. Section 529 plans are not guaranteed by any state or federal agency.

Footnote

Contributions during 2024 between $18,000 and $90,000 ($36,000 and $180,000 for married couples electing to split gifts) made in one year can be prorated over a five-year period without subjecting you to federal gift tax or reducing your federal unified estate and gift tax credit. If you contribute less than the $90,000 ($180,000 for married couples electing to split gifts) maximum, additional contributions can be made without you being subject to federal gift tax, up to a prorated level of $18,000 ($36,000 for married couples electing to split gifts) per year. Federal gift taxation may result if a contribution exceeds the available annual gift tax exclusion amount remaining for a given beneficiary in the year of contribution. For contributions between $18,000 and $90,000 ($36,000 and $180,000 for married couples electing to split gifts) made in one year, if the account owner dies before the end of the five-year period, a prorated portion of the contribution may be included in their estate for federal estate tax purposes. Please consult your tax and/or legal advisor for guidance.

Footnote ² The required beginning date for RMDs is April 1 of the year after you turn age 73. You are required to take an RMD by Dec. 31 each year after that. If you delay your first RMD until April 1 in the year after you turn 73, you will be required to take two RMDs in that year. You may be subject to additional taxes if RMDs are missed. Please see your tax advisor regarding your specific situation.

Footnote ³ To be eligible for favorable tax treatment afforded to the earnings portion of a withdrawal from a Section 529 account, such withdrawal must be used for "qualified higher education expenses," as defined in the Internal Revenue Code. The earnings portion of a withdrawal that is not used for such expenses is subject to federal income tax and may be subject to a 10% additional federal tax, as well as applicable state and local income taxes. The additional tax is waived under certain circumstances. The beneficiary must be attending an eligible educational institution at least half time for room and board expenses to be considered a qualified higher education expense, subject to limitations. Institutions must be eligible to participate in federal student financial aid programs. Some foreign institutions are eligible. You also can take a federal income tax-free distribution from a 529 account of up to $10,000 per calendar year per beneficiary from all 529 accounts to help pay for tuition at an eligible elementary or secondary public, private or religious school. Qualified higher education expenses now include expenses for fees, books, supplies and equipment required for the participation of a designated beneficiary in an apprenticeship program registered and certified with the Secretary of Labor under the National Apprenticeship Act and amounts paid as principal or interest on any qualified education loans of the designated beneficiary and each sibling of the designated beneficiary, up to a lifetime maximum of $10,000 per individual. Distributions with respect to the loans of a sibling of the designated beneficiary will count toward the lifetime limit of the sibling, not the designated beneficiary. Such repayments may impact student loan interest deductibility. State tax treatment may vary for distributions to pay for tuition in connection with enrollment or attendance at an eligible elementary or secondary public, private or religious school, apprenticeship expenses and payment of qualified education loans.

Footnote ⁴ Section 529 plans are established by various states and are offered to residents of all states. Depending on the laws of the customer's home state, favorable tax treatment for investing in a Section 529 plan may be limited to investments made in a Section 529 plan offered by the customer's home state. Neither Merrill Lynch, Pierce, Fenner & Smith Incorporated nor any of its subsidiaries are tax or legal advisors. We suggest you consult your personal tax or legal advisor before making tax- or legal-related investment decisions.

Footnote ⁵ Assets from a 529 account may only be rolled over to a Roth IRA if the following criteria are met: a) the 529 account must have been open for at least 15 years; b) the Roth IRA must be in the same name as the 529 account beneficiary; c) the rollover is subject to Roth IRA annual contribution limits; and d) the Roth IRA owner must have annual income at least equal to the amount of the rollover. However, Roth IRA income limits do not apply to a rollover from a 529 account to a Roth IRA. Rollovers will be limited to the aggregate amount of contributions made to the 529 account (and any earnings) before the five-year period ending on the date of the rollover; and a lifetime rollover limit of $35,000 per 529 account beneficiary. Rollovers must be made in the form of a direct trustee-to-trustee transfer.

Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
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