Author: Jennifer Climo
A few weeks ago, we wrote about making tax-efficient gifts to charity . Today we are going to discuss why you should give—and how to give—to individuals in a tax-efficient way.
Happiness
What makes people happy, content and fulfilled? More money and more stuff can give a temporary boost to someone’s mood, but it can’t make them truly happy. Financial contentment is understanding that money and things are not what provide fulfillment. What makes most people happy is having a sense of purpose, having a sense of contentment, spending time with family and friends, and making a difference in the world.
According to Psychology Today , being kind to others makes people happier. “Kindness makes you happier, and happier people engage in more acts of kindness.”(Of course, other things, such as resilience, also contribute to happiness.) Speaking from experience, making a difference in someone’s life can cause a rise in your endorphins, resulting in a “helper’s high.”
Helping Others
If you want to directly give money, assets or services to individuals in need, there are several things you should be aware of:
- The gift tax
- The generation-skipping tax
- Capital gains tax rates
- Public benefits
Gift Tax
The gift tax is paid by the donor. Everyone receives a lifetime exemption, currently $11.7 million, and an annual exemption of $15,000 per year per person. If the value of the gifts you give exceeds $15,000 per year per person, then you will need to file a gift tax return and use part of your lifetime gift exemption to avoid paying gift tax.
In addition to gifts under $15,000, you can pay an unlimited amount for a person’s medical care or education, with no gift or generation-skipping tax consequences, if you pay the facility directly. For example, you can pay your grandchildren’s college bills directly, and there is no gift tax return required or tax due. Here are two other examples: you can directly pay your parents’ medical bills or your adult relative’s health insurance, again avoiding a gift tax return or having any tax due.
If a married couple decides to use their combined or separate assets to give $30,000 to an individual in one calendar year, they should each file a gift tax return and elect gift splitting in order to avoid paying gift tax and to start the three-year statute of limitations on the tax return. (Generally, after the statue of limitations has expired, the Internal Revenue Service does not audit the return unless they suspect fraud or lack of adequate disclosure of your gifts.)
A common mistake on gift tax returns is not listing all charitable gifts made in that year. This is required only if you are filing a gift tax return for another purpose (that is, disclosing large gifts to individuals) and does not result in any tax, but if you leave those gifts off, the IRS could argue the statute of limitations does not apply because the disclosure of gifts was not complete.
Generation-Skipping Tax
If you make the gift to your grandchild, then the generation-skipping tax may apply. This is in addition to the gift tax. As with the gift tax, everyone (currently) receives a $11.7 million exemption from this tax as well as a $15,000 per-year per-person exemption. When filing a gift tax return, it is important to consider the generation-skipping tax implications, as the exemptions and rules vary slightly from the gift tax rules.
The generation-skipping tax applies to gifts to anyone more than 37.5 years younger than the donor.
Capital Gains Tax Rates
You don’t have to give just cash to an individual—you could also gift appreciated stocks, mutual funds or exchange traded funds (ETFs), and while you would have paid 23.8% or higher in federal income taxes on the capital gains, the recipient might pay nothing in taxes. This is because of the 0% capital gains tax rate in effect for individuals with taxable income less than $40,400 ($80,800 for a couple). This strategy takes a little tax planning with their other income but can be a very tax-efficient way of transferring assets. For example, if you gifted $15,000 worth of stocks (with a built-in capital gain of $12,000) to a couple with $50,000 in W-2 income and then they sell the shares of stock, their total income will now be $50,000 + $12,000 = $62,000 and they will pay no federal income tax on the capital gains. However, additional income can have consequences, and you should be aware of this effect on their public benefits, which we will discuss next.
Public Benefits
The federal government provides support for food, housing, child care and medical costs for the poor. For example, families whose income doesn’t exceed 220% of the federal poverty level (about $26,500 for a family of four, so 220% = $58,300) can qualify for child care scholarships . If a family of four had gross income of $50,000, giving this family $15,000 worth of stocks with a built-in capital gain of $12,000 would result $62,000 of gross income if they sold the stocks, disqualifying them from child care benefits. Food stamp support, subsidized rent and other benefits use different calculations but could result in the same problem. Every state calculates these benefits slightly differently, so refer to your state’s department of health and human services for specifics (here is the link for New Hampshire ).
Additional income or assets can also impact an individual’s ability to qualify for subsidized health insurance and college financial aid. Financial gifts are not usually considered income for these purposes, unless the sale of an asset results in taxable income.
It may be a better idea to provide financial support for individuals receiving public benefits by paying their bills directly. This avoids giving them assets or income that disqualifies them from the benefits they are receiving.
Conclusion
Helping individuals or families directly can make a donor feel good but can also have unintended consequences. While it is unlikely that the gift tax or generation-skipping tax will apply to your gifts today, in 2026 the estate/gift/generation-skipping transfer exemptions are scheduled to fall by half. You should continue to evaluate whether this applies to you when making gifts to individuals.
Also, carefully consider whether the family you are helping is receiving public benefits, and structure your gift so it doesn’t negatively impact them.
Jennifer Climo, CFP®, CPA, MSFP is an advisor at Milestone Financial Planning, LLC, a fee-only financial planning firm in Bedford NH. Milestone works with clients on a long-term, ongoing basis. Our fees are based on the assets that we manage and may include an annual financial planning subscription fee. Clients receive financial planning, tax planning, retirement planning, and investment management services, and have unlimited access to our advisors. We receive no commissions or referral fees. We put our clients’ interests first. If you need assistance with your investments or financial planning, please reach out to one of our fee-only advisors .
