Can you recall the joys of Christmas as a child? There’s the excitement of seeing packages under the tree and then we open them with great anticipation. It's not until later in life that we appreciate the even greater joy of giving.
"For it is in giving that we receive."
ST. FRANCIS OF ASSISI
Research has shown that happiness is much more sustainable after regular giving than after regularly receiving.1 We’re going to review 6 ideas for charitable giving this year and how to maximize the tax benefits of doing so.
#1 Make Larger Cash Gifts in 2021
The Taxpayer Certainty and Disaster Tax Relief Act of 2020 allows you to deduct cash gifts to charity up to 100% of your adjusted gross income (AGI) if you itemize deductions. This will revert back to the normal 60% of adjusted gross income next year.2 The donation must be made to a public, qualified charity and not to a donor advised fund, private non-operating foundation, supporting organization, or split-interest giving entities such as charitable remainder trusts, or charitable lead trusts. If a donor gives more than they are allowed to deduct on their income tax return, excess deductions may be carried forward for up to five subsequent tax years.
#2 Give Appreciated Assets Instead of Cash
The stock market has rewarded investors with significant gains over the past dozen years. It’s quite possible you’re holding a position with large unrealized capital gains (meaning the value has increased since you purchased it). It may also be a larger percentage of your portfolio than you intended, which potentially increases portfolio risk. Rather than trim the position and pay taxes on the sale, you could give a portion to charity. If you’ve held the asset for more than a year, you can deduct the full market value of the asset and avoid realizing the capital gain on your tax return. The charity can then sell the position and avoid paying tax as well. You could also give entire positions and simply buy them back if you want to retain the position in your portfolio. The main point here is that giving appreciated assets (such as stocks, real estate, etc.) allows you to avoid realizing the capital gain AND get a tax deduction provided you itemize deductions. If you take the standard deduction, you still benefit by avoiding the capital gain.
#3 Bunch Deductions with a Donor Advised Fund
The standard deduction in 2021 is $25,100 for married couples filing joint, $12,550 for single taxpayers and married individuals filing separate, and $18,800 for filing as head of household. For those age 65 and older or who are blind can claim an additional $1,350 ($1,700 if using the single or head of household filing status). These high levels make it difficult to receive much of any deduction for your charitable giving. Tax benefits should not be a primary driver of giving to charity, but what if you could structure your giving so that you can benefit charity and lower your tax bill? One such strategy, commonly referred to as bunching deductions, calls for donating multiple years’ worth of charitable giving to a donor advised fund. This fund is an account you set up to hold assets or cash for charity. The idea is that giving 2, 3, or even more years’ worth of gifting allows you to exceed the standard deduction, itemize your deductions for that year, and get more of a tax benefit for the giving you’re doing. You can then invest the fund or keep it in cash and direct gifts to charity out of the fund over time as you see fit. You can establish a donor advised fund at Schwab, Fidelity, or a local community foundation for those that offer them, and either give cash or appreciated assets (the latter is more advantageous as we mentioned in #2 above).
#4 Give from Your IRA
For those who are age 70.5 or older, you have an opportunity to give from your IRA assets and save on current and future taxes. When you give from regular (non-IRA) assets, you likely won’t get a full deduction for it due to the standard deduction being so high. For example, if you’re married, have $17,800 in other deductions, and give $20,000 to charity, you’ll only benefit from half of the charitable donation since $27,800 is your standard deduction ($25,100 plus $1,350 additional for each of you assuming you’re both 65 or older). The first $10,000 of your charitable donation counts towards getting up to your standard deduction and then you can itemize your deductions and benefit from the other $10,000 of your charitable donation. Instead, you could simply take the standard deduction, give from your IRA, and that full amount will be deemed a qualified charitable distribution (QCD). Such IRA distributions for charity are not taxable for amounts up to $100,000 per year for each IRA owner. This is especially beneficial for those age 72 or older with required IRA distributions and who don’t need those distributions from their IRA. This takes what would have been taxable income (regular IRA distributions are taxed as ordinary income) and essentially turns it into non-taxable income if it’s for a qualified charity. Reducing your taxable income may also result in additional benefits, such as reducing your Medicare premium surcharge or increasing other deductions that are based on your income. Giving from your IRA is a great way for retirees to give to charity and many custodians also allow you to have a checkbook for your IRA, which makes giving easy. Just be sure to keep records of your gifts and provide this information to your tax preparer so they can properly record your non-taxable distributions to charity.
#5 Unique 2021 Opportunity for Those Taking the Standard Deduction
Just like the increased adjusted gross income limit opportunity mentioned in #1 above, there is another option for giving that is set to expire after this year. For those who plan to take the standard deduction for 2021, you can still deduct up to $600 for married individuals filing joint or $300 for other filers if you give a cash gift to a qualified charitable organization. It does not qualify for non-cash gifts such as securities or household items. There are currently no plans to extend this into next year.
#6 Charitable Trusts
If you want to give to charity, but also benefit yourself and/or your family, then a charitable trust may make sense. Given the extra administrative expenses of a trust, the gift should be larger ($500,000 or more might be large enough to consider a trust). There are generally two kinds of charitable trusts. A charitable remainder trust allows you to receive an income stream over a number of years and then whatever is remaining gets distributed to the charity (or charities) you’ve selected. A charitable lead trust provides ongoing payments to charity with the remainder being distributed to individuals (usually family). Without getting too much into the mechanics, this may be a great year for the charitable lead trust as low interest rates right now allow you to get a higher charitable deduction. Like a donor advised fund, you can also donate appreciated assets and reduce your tax bill.
Giving to charity, your church, or your children’s school can be rewarding and fulfilling, and it affords you the opportunity to align your capital with your values. Having the financial means to improve the lives of others is a blessing. Giving in a tax-smart way allows you to be a good steward and make the most of the resources you have.
Journey Beyond Wealth is an Investment Advisor registered with the State(s) of GA, TN, LA. All views, expressions, and opinions included in this communication are subject to change. This communication is not intended as an offer or solicitation to buy, hold or sell any financial instrument or investment advisory services. Any information provided has been obtained from sources considered reliable, but we do not guarantee the accuracy, or the completeness of, any description of securities, markets or developments mentioned. This content may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.