Tax-Savvy Ways to Give

Summary: If you’re inclined to help others, consider these insights from Morgan Stanley at Work on tax-efficient strategies you can use to help make your giving go further.

Many of us prefer to combine our support for the causes and people we care about with a desire to save on taxes. Fortunately, there are strategies that may help us accomplish both—and your equity compensation can play a part. 

Whether you want to donate to charity or invest in a loved one’s future, consider these tax‐smart ways to give and ways that your equity compensation can help make your giving go further.

Contributing directly to a 529 education savings plan can give the gift of education directly to a student. Anyone, including grandparents, can contribute up to $16,000 per year ($32,000 for married couples electing to split gifts) to any individual’s 529 plan, without incurring federal gift tax or using the federal lifetime gift tax exemption. Many states offer state income tax deductions to residents who contribute to their own state’s plan, while some states offer tax deductions regardless of which plan you invest in.

Additionally, unique to 529 plans, the federal tax code allows you to front load up to five times the annual gift tax exclusion in a single year.¹ Single individuals are therefore able to contribute up to $80,000 per recipient in a single year, while married couples electing to split gifts can contribute up to $160,000 per recipient in a single year. 

If you have the means, you can even take advantage of six-year gift tax averaging. To do this, you can contribute one year's worth of gifts in December, followed by five years’ worth of contributions in January, effectively making six years’ worth of contributions in just two months.² Also note that 529 plan account owners may take federal income tax-free 529 plan distributions not only for certain higher education expenses, but also for certain primary and secondary education expenses, apprenticeship expenses and student loan repayments.³

Morgan Stanley offers the Morgan Stanley National Advisory 529 Plan, the first 529 plan of its kind, available nationwide, exclusively to Morgan Stanley clients. You can select from goals-based asset allocation portfolios, guided by Morgan Stanley thought leaders, that align with your unique time frame, risk profile and goals, while gaining access to institutional caliber fund managers and pricing. To find out more, speak with a Morgan Stanley Financial Advisor or Private Wealth Advisor and your personal tax and legal advisors to determine whether this strategy might be appropriate for you. 

Making financial gifts before year end may help reduce estate taxes. You can gift up to $16,000 ($32,000 for married couples electing to split gifts) per recipient to an unlimited number of individuals per year without incurring a federal gift tax. Note that you can’t carry over unused annual exclusions from one year to the next. The transfers may help your family as a whole pay fewer taxes if you give income-earning property to family members in lower income tax brackets. The $16,000 annual exclusion doesn’t count against the federal gift tax exemption of $12.06 million for individuals or $24.12 million for married couples in 2022.⁴ It is noteworthy that gifts in the form of tuition payments made directly to an educational organization, as well as medical expense payments made directly to the provider, are not taxable gifts and do not count against your $16,000 annual exclusion for gifts or reduce your federal lifetime gift tax exemption. 

Appreciated investments can be donated to qualified charitable organizations, which would allow individuals to take a deduction in the year the donation is made and avoid paying capital gains tax on the appreciation. Note that donating appreciated investments—like shares of your equity compensation—that you have owned for more than a year can allow you to take a larger deduction than donating appreciated investments that have been held for one year or less.⁵ Additionally, for investments that have losses, it may be prudent to sell the investments first in order to realize the losses and then donate the proceeds of the sale to a qualified charity for an additional tax deduction.

A donor advised fund (DAF) is one option for gifting appreciated investments. A DAF, such as the Morgan Stanley Global Impact Funding Trust (MS GIFT), gives taxpayers a tax-efficient way to donate stock, mutual funds or other assets they own without liquidating them, and allows them to claim a federal income tax deduction.⁶ 

A Grantor Retained Annuity Trust (GRAT) may allow you to pass the appreciation in the value of assets in the GRAT, in excess of a hurdle rate set by the IRS (the 7520 rate), to your beneficiaries with potentially little to no federal gift tax consequences. Speak with your tax advisor to see if this strategy may make sense for you.

If you have complex tax planning needs, reach out for support. Your Executive Services Relationship Manager can help you identify information you may need and can connect you with a Morgan Stanley Financial Advisor or experienced tax professionals at leading providers across the country to assist.

In addition, your company equity plan offers opportunities to work with Morgan Stanley Financial Advisors who can help you create tax-smart techniques and strategies that can deepen the impact of your giving and potentially reduce the impact of taxes—all year round—as part of our Total Tax 365 approach. Talk to your Relationship Manager to learn more. 

1. An election to treat the gift as being made over a five-year period must be made on a gift tax return for the year in which the contribution is made.
2. This assumes there are no other gifts made by the donor to the beneficiary in the year of contribution to the 529 plan or in the four years after the year in which an accelerated gift is made. Any gifts made in the year of contribution to the 529 plan or in the four years after the year in which an accelerated gift is made may result in a taxable gift or use of the donor’s federal lifetime gift exemption. If the donor dies within five years of making an accelerated gift, a portion of the gift may be included in the donor’s estate.
3. Note, using 529 plan distributions to repay qualified student loans may impact the deductibility of student loan interest. The state tax treatment of 529 plans (including the state tax treatment of contributions and distributions) may be different from the federal tax treatment and may vary based on the particular 529 plan in which you participate and your state of residence. If the applicable state tax law does not conform with the federal tax law, 529 plan distributions used to pay certain expenses, such as principal and interest on qualified student loans and/or qualifying apprenticeship costs, may not be considered qualified expenses for state tax purposes and may result in adverse state tax consequences to the account owner or designated beneficiary.
4. Any use of your lifetime federal gift exemption will result in a corresponding reduction in your federal estate tax exemption available at your death.  A portability election must be made on a deceased spouse’s estate tax return in order for the unused portion of the deceased spouse’s estate tax exemption to be available to the surviving spouse.
5. If a stock is held for one year or less, the deduction a taxpayer receives for donating that stock to a qualified charitable institution is limited to the lesser of the fair market value or cost basis of the stock. If the stock is donated after it has been held for more than one year, the taxpayer may receive a deduction equal to the fair market value of the stock.
6. The maximum deduction for a cash gift to a DAF is limited to 60 percent of adjusted gross income (AGI); deductions exceeding AGI limits may be carried forward for up to five years. Grants can be made over time to any U.S. organizations that are tax-exempt public charities, U.S. religious houses of worship, U.S.-qualified foreign charitable organizations and at a reduced benefit, to certain domestic and foreign organizations that do not qualify as U.S. public charities.

The source of this Morgan Stanley article, Tax-Efficient Charitable Giving Strategies, was originally published in February 2022.