“Giving Tuesday” was December 1st this year, but you have until December 31st to make charitable contributions that qualify for a 2020 tax deduction. With the increase in the standard deduction starting in 2018, many people no longer have been able to reduce their tax bill with their charitable donations because the total of their itemized deductions no longer exceeded their standard deduction. However, philanthropy, whether on a small scale or large, still plays a part in many of our lives, regardless of any tax break for which we may qualify. And tax benefits still exist, especially in 2020.
Take Advantage of Special Gifting Opportunities in 2020
The Cares Act that was passed in response to the coronavirus crisis included a provision that, in 2020, taxpayers can take a $300 (single)/$600 (joint) charitable deduction even if their total itemized deductions do not exceed their standard deduction. So make sure you have a record of your charitable contributions and give it to your tax professional.
Another provision in the Cares Act allows taxpayers to deduct 100% of charitable contributions in 2020 up to 100% of Adjusted Gross Income, rather than the normally-allowed 50%, 30%, or 20%, depending upon how the IRS classifies the organization receiving the donation. Therefore, bunching several years’ worth of contributions to one or more charitable organizations into 2020 may be a particularly good strategy this year for donors planning large gifts because it may provide a larger deduction than in normal years. However, this rule change only applies to cash gifts made directly to the charitable organization and not to non-cash gifts or donations made to a donor-advised fund or a private foundation.
Make Charitable Contributions in Alternate Years
For taxpayers whose itemized deduction do not quite reach their standard deduction, they may consider bunching two or more years of contributions into one year and taking the standard deduction in the other year. In 2020, the standard deduction is $12,400 single/$24,800 joint. If you are age 65+, the figures are $13,700 single and $27,400 joint. So, for example, if a couple filing jointly has the maximum of $10,000 in state and local taxes, $10,000 in mortgage interest, and usually makes $5,000 in charitable contributions, for a total of $25,000 in itemized deductions, only the last $200 of that total represents a deduction above their $24,800 standard deduction. So, assuming they are in the 22% marginal tax bracket, over two years that may save them only $44 in taxes, all due to 2020, because in 2021 the standard deduction rises to $25,100. But if they contribute $10,000 this year, the additional deduction this year rises to $5,200 and saves them $1,144 in taxes. Then next year they can skip their contributions and take the standard deduction.
Use Charitable Contributions to Offset Income from Roth Conversions
If you are considering a Roth conversion before the end of the year, you may be able to offset part or even all of the additional taxable income created by the conversion by making charitable contributions. When you convert all or part of a Traditional IRA into a Roth IRA, the amount of the conversion is taxable income at ordinary income tax rates. Any charitable contributions you are able to make in excess of your standard deduction can offset additional income from the Roth conversion and reduce your tax liability.
Make a Qualified Charitable Distribution
If you have reached age 70½, you can make a Qualified Charitable Distribution (QCD) of up to $100,000 from your Traditional IRA to a qualified charity. This reduces federal taxable income, like a tax deduction, even if you use the standard deduction. You must move the money directly to the charity from the IRA. If you are already taking Required Minimum Distributions (RMDs), which you do not need to take this year due to the Cares Act, you can withdraw from your Traditional IRA anyway, and offset the increase in your taxable income by making a QCD. A QCD has the additional benefit of reducing taxable income in future years by reducing future RMDs.
Contribute Appreciated Securities
A taxpayer can contribute an appreciated stock or other security that has been held for at least one year to a qualified charity and take the fair market value as an itemized deduction up to 30% of the Adjusted Gross Income. When this is done, no capital gains taxes apply to the donor. This may be particularly beneficial to someone who has a very large position in one stock and is reluctant to pare back that position out of fear of capital gains taxes. Note: Some securities, such as restricted or privately traded securities, may have additional requirements and limitations.
Consider a Donor Advised Fund…
A Donor Advised Fund (DAF) is like a personal charitable savings account that is controlled by a nonprofit, referred to as a sponsoring organization, that invests the assets and manages the account. Two such sponsoring organizations are Fidelity Charitable and Schwab Charitable. A DAF allows donors to make an irrevocable charitable contribution, receive an immediate tax deduction and then recommend grants from the fund over time. Donors can contribute cash, securities, or other assets to the fund as frequently as they like, and then recommend grants to their favorite charities whenever it makes sense for them. DAFs offer a good vehicle for bunching contributions in a single year, as described above, because you do not have to specify the charity at the time of the contribution.
…or a Private Foundation
Highly philanthropic people who want to make substantial charitable contributions and leave a legacy to be carried on by future generations may want to consider setting up a private foundation. A private foundation is managed by its own board of directors, receives most of its financial support from and is normally controlled by its founders, and must make charitable distributions throughout the taxable year. A private foundation is a tax-exempt organization, but must pay a nominal excise tax on net investment income. Although it typically makes grants to public charities, it can also run programs, provide services, and conduct direct charitable activities, as well as provide aid to individuals and families for disaster relief and hardship assistance. Setting up a private foundation will likely require the assistance of a CPA or attorney.
If you would like assistance with your end-of-year planning or charitable giving, give West Branch Capital a call today at (413) 256-1225 x6, or send us a message any time.