Annual Giving: Using the Gift Tax Exclusion and Charitable Deductions to Optimize Tax Outcomes

For high-net-worth individuals, giving gifts is more than a meaningful gesture, as strategic giving can help create a legacy of generosity, preserve wealth for future generations, and reduce tax exposure. When integrated into a long-term wealth transfer plan, developing a deliberate giving strategy and revisiting it annually allows you to provide meaningful support to family and charitable organizations while making full use of available estate and income tax planning opportunities. It is important to have a distinct strategy for both giving to family and charitable organizations, as each has its own tax implications and benefits.

Giving to family as part of a long-term wealth transfer plan

Regularly giving to family during your lifetime provides family members with an immediate benefit, while also allowing you to reduce potential federal estate and gift tax exposure. The IRS combines both taxable gifts made during your life and the value of your estate when you pass away to determine your total federal estate tax liability. This makes it important to consider annual gifts to family members strategically to help ensure your assets are transferred to your intended beneficiaries in a tax-efficient manner.

High-net-worth individuals may significantly reduce their federal gift and estate tax exposure by leveraging the annual gift tax exclusion and the federal lifetime estate and gift tax exemption. The annual gift tax exclusion allows gifts to be made each year without reducing the lifetime exemption up to a certain amount, while transfers above the annual exclusion limit diminish the lifetime exemption available for future transfers. Both tax provisions allow wealth to be transferred tax-free to recipients of your choosing, so understanding how they work can inform your tax planning strategy and help you coordinate your wealth transfer more effectively over the long term.

Understanding two key tax provisions for efficient family giving

Annual gift tax exclusion

The IRS allows you to gift up to a certain amount each calendar year to as many individuals as you choose. If a gift exceeds the annual gift tax exclusion, the amount exceeding this annual limit is considered a taxable gift. Taxable gifts either consume a portion of your federal estate and gift tax exemption or are subject to gift taxes if your exemption has been fully exhausted. By consistently using your annual gift tax exclusion each year, you can gradually reduce the size of your taxable estate to potentially lower future estate taxes.

In 2025, the annual gift tax exclusion is $19,000 for gifts from individuals and $38,000 for gifts from married couples. The exclusion amount is typically increased annually to adjust for inflation. Because the limit resets each year, consistently using the exclusion amount over time to make gifts to family can become a powerful strategy to reduce your taxable estate. Generally, lowering the value of your taxable estate can help decrease your federal estate tax liability.

For example, consider a gift of $50,000 made from a married couple to their child in 2025. The first $38,000 has no gift tax consequences, as it falls within the annual gift tax exclusion amount that permits a tax-free transfer. The excess $12,000 is considered a taxable gift by the IRS, which either reduces the couple’s lifetime estate and gift tax exemption by that amount or, if the lifetime exemption has already been exceeded, is subject to gift taxes at a top rate of 40%.

Federal lifetime estate and gift tax exemption

You may transfer taxable gifts during your life or assets at death up to a certain amount without incurring federal estate or gift taxes. This limit, known as the federal lifetime estate and gift tax exemption, allows you to transfer a substantial amount of wealth tax-free. Strategic use of this tax exemption helps you keep more assets intact for your family to sustain their lifestyle and preserve generational wealth.

With the passage of the One Big Beautiful Bill Act (OBBBA), the federal lifetime estate and gift tax exemption will increase to $15 million per individual starting in 2026, avoiding the scheduled sunset that would have significantly reduced the exemption amount from $13.99 million in 2025 to $5 million per individual in 2026, as adjusted for inflation. For married couples, the exempted amount is effectively doubled to $30 million, as each spouse is entitled to use their full individual exemption.

The OBBBA makes the lifetime exemption permanent at an all-time high amount. Even with this favorable change, it remains important to make ongoing use of the annual gift tax exclusion to preserve your lifetime exemption. Further, when you use your federal estate and gift tax exemption, you should do so strategically to maximize the amount transferred tax-free to your family and charitable beneficiaries.

Even if you are not currently facing potential federal gift and estate taxes, gifts that fall within the annual exclusion limit can help simplify your tax planning by avoiding the need to file a gift tax return altogether. This can be especially useful when making significant, one-time gifts for specific purposes, such as contributing toward your child’s home purchase, funding a child’s wedding, or helping your grandchild celebrate a college graduation.

Family giving strategies to help lower federal gift and estate taxes

Below are a few ways to strategically gift during your lifetime while making the most of your annual gift tax exclusion or strategically using your lifetime estate and gift tax exemption.

Directly pay for tuition or medical expenses

• The IRS allows you to make unlimited payments for someone else’s qualified tuition or medical expenses without triggering a taxable gift.
• Payments for qualified tuition and medical expenses do not count toward your annual gift tax exclusion and do not reduce your lifetime estate tax exemption, so evaluating whether to directly pay for a loved one’s tuition or medical expenses on an annual basis can be a highly effective estate and gift tax planning strategy.
• To qualify, payments must be made directly to the educational institution or medical provider, not to the individual receiving the benefit.

Contribute to a 529 plan

• A 529 plan is a tax-advantaged investment account that allows contributions to grow tax-free, with no federal income tax due on withdrawals used for qualified education expenses.
• Parents and grandparents can use “accelerated gifting” to contribute up to five times the annual gift tax exclusion in one year without triggering a taxable gift, creating the opportunity for a sizable reduction in the donor’s taxable estate and potential gift and estate tax liability.
• Saving early for your child’s education and revisiting 529 contributions annually can help maximize tax-free compound growth and ensure you are fully utilizing available giving opportunities.

Fund a trust with family members as beneficiaries

• Funding an irrevocable trust, using your annual gift tax exclusion or a portion of your lifetime estate and gift tax exemption, can help you transfer assets out of your taxable estate while deciding how and when beneficiaries receive distributions.
• Trusts can be tailored to serve a variety of purposes, such as providing for minors, supporting a surviving spouse, or keeping life insurance proceeds out of your estate, all while helping reduce estate and gift tax exposure.
• Depending on the trust’s structure and terms, additional benefits, in some cases may include asset protection from a beneficiary’s creditors or divorced spouse, privacy by avoiding public probate filings, and tax-efficient wealth transfer across multiple generations.

Fund a UGMA or UTMA account for children or grandchildren

• Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts are custodial accounts that allow adults to manage assets on behalf of a minor until the child reaches the age of majority, at which point full control of the account transfers to the beneficiary.
• Contributions to these accounts can qualify for the annual gift tax exclusion, offering a straightforward way to transfer wealth to your child or grandchild, allowing funds to potentially grow through investment, and reducing your taxable estate over time to manage future gift or estate tax exposure.
• Once the beneficiary assumes ownership, they may use the funds for any purpose, which offers flexibility for the beneficiary but limits the donor’s ability to control how the assets are ultimately spent.

Charitable giving can help lower your federal income and estate tax liability

Philanthropic giving can complement annual giving to family and should be considered separately because giving to qualified charitable organizations may provide an income tax deduction that can lower your annual federal income tax liability. In addition, charitable contributions will reduce your taxable estate, in turn lowering your federal estate and gift tax liability. When you donate appreciated assets, you will not be obligated to pay capital gains taxes that would otherwise be owed upon sale.

Maximizing the tax benefit from charitable giving can be nuanced, as donors must decide each year whether to claim the standard deduction or itemize their deductions. With a historically high standard deduction and certain limits on itemized deductions, such as the cap on the state and local tax deduction, many high-net-worth taxpayers no longer itemize deductions every year. As a result, some choose to bunch charitable contributions in a single year to surpass the standard deduction threshold, making it important to reevaluate which approach offers you the greatest tax advantage on an annual basis.

Recent changes under the OBBBA add new layers of complexity for tax planning. The higher standard deduction is now permanent, and the legislation introduced an above-the-line charitable deduction of $1,000 for single filers and $2,000 for married couples who take the standard deduction. These changes, combined with the new 0.5% adjusted gross income (AGI) floor on itemized charitable contributions, may make the standard deduction more attractive in certain years. The most effective strategy will depend on your family’s philanthropic goals, expected income, and whether your itemized deductions are likely to exceed the standard deduction in a given year.

Charitable giving strategies to help lower federal income, estate, and capital gains taxes

Given the need to reassess each year whether to itemize deductions or take the standard deduction, it is important to evaluate which charitable giving strategies align with your objectives annually. Below are several common giving vehicles to consider whether you want to bunch contributions in certain years or establish a regular cadence of giving over time.

Make direct donations to public charities

• Directly donating to public charities is straightforward and, like many of these other strategies, can remove assets from your taxable estate to reduce potential estate tax liability, eliminate capital gains taxes on appreciated assets, and may provide an income tax deduction.
• Deduction limits for charitable contributions range from 20% to 60% of the donor’s AGI, depending on the asset type and recipient organization. Donations of long-term appreciated assets are generally deductible at fair market value up to 30% of the donor’s AGI.
• To claim a charitable deduction, donations must be made to IRS-qualified charitable organizations. Proper documentation of the donation should be retained to substantiate the deduction in case of an IRS audit.

Contribute to a donor-advised fund

• A donor-advised fund (DAF) is an account that holds donated assets such as cash, publicly traded securities, or privately held business interests before distributing funds to qualified charitable organizations.
• DAF accounts are held by a DAF-sponsoring organization, and assets can be invested for potential tax-free growth. Contributions are generally eligible for an immediate income tax deduction of up to 60% of the donor’s AGI for those who itemize deductions.
• Donations to a DAF are irrevocable. The DAF-sponsoring organization ultimately has the final say on grant approvals, though donors can recommend how and when funds are distributed to qualified charities.

Form or donate to a private foundation

• A private foundation is a charitable organization that may be structured as a charitable trust or a nonprofit corporation to support charitable activities.
• Donations to a private foundation may provide an income tax deduction of up to 30% of the donor’s AGI for those who itemize deductions, and establishing a private foundation offers a way to engage family members in long-term charitable giving, including compensation for family members employed by the foundation.
• Private foundations require ongoing administration, mandatory annual filings of the Form 990-PF tax return, and must comply with an annual 5% minimum distribution requirement.

Fund a charitable remainder trust

• A charitable remainder trust is an irrevocable trust that first distributes income to you or your beneficiaries for a specified time before distributing the remaining assets to philanthropic beneficiaries.
• Funding a charitable remainder trust may provide a partial income tax deduction based on the present value of the portion donated to charity.
• Specific benefits of a charitable remainder trust depend on its structure, and due to their complexity, those considering this strategy should solicit the help of an estate planning attorney.

Establish a charitable gift annuity

• A charitable gift annuity is a contract between a donor and a charitable organization. The donor typically contributes an irrevocable contribution up front in exchange for a fixed income stream for life, with the remaining funds passing to the charity upon the donor’s death.
• Donors may be eligible for a partial income tax deduction based on the charitable portion of the gift, and a part of each annuity payment may be tax-free for a specified timeframe based on the donor’s life expectancy.
• Keep in mind that charitable gift annuities provide fixed payments set in the beginning that are not adjusted for inflation, are subject to income tax, and generally support only one charitable organization unless multiple annuities are established.

Designing your personalized annual giving plan with terms and governance that meet your family’s giving objectives

Regularly reviewing your giving strategies can help ensure you maximize the estate and tax planning benefits of your gifts. Partnering with a team of specialists that can provide detailed guidance on navigating planned giving is an effective way to align your philanthropic goals with desired tax benefits.

At Commerce Trust, your private wealth management team is comprised of tax management^*, estate planning, and investment management specialists who can guide you through the complexities and considerations of strategic giving, from designing a planned giving strategy to implementing it alongside your advisors. Our team can help you determine which assets to gift, when to make gifts, and why, according to a timeline that supports your objectives.

Contact Commerce Trust today to learn more about how your private wealth management team can help you structure your giving to benefit you, the individuals you care about, and the charities you support.

^*Commerce does not provide tax advice to customers unless engaged to do so.

The opinions and other information in the commentary are provided as of September 8, 2025. This summary is intended to provide general information only and may be of value to the reader and audience.

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