1. Help fund a child’s education with a 529Depending on your state of residence, contributing to a 529 college savings plan could cut your state income tax bill. When contributing to a 529, keep these points in mind:
- Growth on your contributions is federally tax-deferred, and withdrawals are tax-free when used for qualified higher-education expenses.
- You can contribute five years’ worth of gifts, up to $70,000 per donor per beneficiary ($140,000 if married filing jointly), in one lump sum. After the fifth year, you can make another gift to the same beneficiary. (If you pass away during the five-year period, a prorated amount of the gift will be included in your estate.)
- You don’t need to file a gift tax return for a gift of up to $14,000. However, if you and your spouse split a larger contribution (up to $28,000 per couple per beneficiary) or you contribute five years’ worth of gifts to a beneficiary, you’ll need to file IRS Form 709 by April 15 of the following year.
2. Give your loved ones gifts during your lifetimeIf you expect the value of your estate to exceed the exemption amount ($5.45 million in 2016), making one or more gifts during your lifetime can help you reduce the estate tax assessed on the amount you pass to your beneficiaries.
If you give assets that later appreciate, the growth won’t be subject to the 40% federal estate tax that applies to assets transferred above the exemption amount. If you have a sizeable estate, this could result in tax savings for your beneficiaries down the road.
You can gift up to $14,000 per donor per recipient ($28,000 per couple per beneficiary) without incurring any gift taxes. (If you make a direct payment for a qualified medical or educational expense on someone’s behalf, it doesn’t count toward your annual gift exclusion or lifetime gift exemption.)
3. Give cash or appreciated securities to your favorite charityCash gifts, which include donations made by check and credit card, to qualified charitable organizations are often tax-deductible. The amount you could save on your income taxes depends on the amount you give, your tax bracket, your income level, the type of asset donated, and the type of charitable organization receiving the donation.
Gifting shares or securities from your Vanguard account?
|Income tax deduction (28% tax bracket)||$280 ($1,000 gift x 0.28)|
|Total tax savings||$280|
Gifting an appreciated security
|Price paid for security||$300|
|Gain||$700 ($1,000 market value – $300 purchase price)|
|Income tax deduction (28% tax bracket)||$280 ($1,000 market value x 0.28)|
|Capital gains tax savings (15% capital gains tax)||$105 ($700 gain x 0.15)|
|Total tax savings||$385 ($280 income tax deduction + $105 capital gains tax avoided)|
The higher your tax bracket, the more this method can save you. Using the same example, if you’re in the 39.6% tax bracket, you’d save $396 ($1,000 x 0.396) in income taxes. And, because the capital gains tax increases to 20% for this tax bracket—and you’d be subject to the 3.8% Medicare surtax on investment income—you’d avoid an additional $167 ($700 x 0.238) in capital gains and Medicare taxes. (You can learn more about these types of charitable donations in IRS Publication 526.)
In general, donating appreciated securities is more advantageous than giving cash due to the value of the tax deduction plus the potential savings from not having to pay capital gains tax.
If you have to take a required minimum distribution (RMD), you can also consider taking advantage of the qualified charitable distribution (QCD) rule by directing all (or a portion of) your RMD directly to a qualified charity.
4. Simplify and maximize your giving with a donor-advised fundThere are a number of ways to give to your preferred charitable organizations. Using a donor-advised fund, such as the one administered by Vanguard Charitable, is a tax-effective, flexible, and convenient way to give. You can open and fund an account online in minutes. Once the account is funded, you receive an immediate tax deduction for the amount of your irrevocable contribution—and you’ll only have one charitable contribution receipt to keep track of. (Learn more about the 2016 year-end contribution deadlines for a philanthropic account.)
Start giving with a donor-advised fund account
When you choose a donor-advised fund at Vanguard Charitable, you can use Vanguard Charitable’s interested party and succession plan options to build a future for your charitable dollars that supports present and long-term goals outside of the boundaries of typical estate planning.
The information provided here is intended to be general and educational in nature and shouldn’t be construed as a substitute for legal or tax advice. Please consult an independent legal and/or tax advisor for specific advice about your individual situation.
Vanguard Charitable was founded by The Vanguard Group, Inc., as an independent, nonprofit, public charity in 1997. Although Vanguard provides certain investment management and administrative services to Vanguard Charitable pursuant to a service agreement, Vanguard Charitable is not a program or activity of Vanguard.
For more information about any 529 college savings plan, contact the plan provider to obtain a Program Description, which includes investment objectives, risks, charges, expenses, and other information; read and consider it carefully before investing. If you aren’t a taxpayer of the state offering the plan, consider before investing whether your or the designated beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state’s qualified tuition program. Vanguard Marketing Corporation serves as distributor and underwriter for some 529 plans.
All investing is subject to risk, including the possible loss of the money you invest.
Vanguard Brokerage Services is a division of Vanguard Marketing Corporation, member FINRA.