2020 looks incredibly different in so many ways compared to previous years. But in some ways: the holiday season ushers in familiar, heartwarming aspects.
When many of us think of the holidays, we think of generosity: of spirit, and of supporting our communities.
The challenges the pandemic has created this year are extraordinary and many charities need support more than ever to meet growing community needs. As we approach the end of the year, we’re outlining some techniques you may want to consider to make the most out of your charitable giving in 2020.
Many of us commonly give cash to charities, but there are other techniques that may be able to generate a positive impact on your tax situation.
- Consider giving appreciated investments to charities instead of cash. You as the donor may receive a charitable deduction equal to the full market value of the investment donated to charity. In addition, any appreciation or capital gain on the investment should not be reported as income to you. And charities don’t have to pay any taxes on the appreciated investment, either!
- Based on changes in the 2020 law due to the pandemic you may be able to give away more cash and receive a deduction equal to 100 percent of your Adjusted Gross Income. This is increased from 60 percent in 2019.
- If you are not itemizing your deductions, there is a special provision in 2020 that allows an individual to give $300 to qualified charities and receive a deduction on their income tax return. In 2021, married couples filing jointly may deduct up to $600.
- If you or a loved one has Individual Retirement Accounts (IRA’s) and are subject to Required Minimum Distributions (RMD), you may elect to send part or all of your RMD to qualified charities instead of taking the distribution personally from the IRA. This is referred to as a “Qualified Charitable Distribution (QCD). Note that while in 2020 RMD’s were waived, meaning that is not required for a person to take the distribution, you may still use the RMD for QCD’s if you would like. For 2021, if you are age 70.5 or older, you may elect to distribute up to $100,000 to qualified charities. For individuals who are subject to RMDs, these distributions to charity will count toward your required distribution amount.
- Consider setting up and funding a Donor Advised Fund (DAF) for your giving. This may be a good technique if you will not be itemizing deductions for this tax year. Instead, you may contribute multiple years of planned charitable contributions into the DAF in 2020. Bunching your charitable contributions may allow you to itemize deductions for an increased total tax deduction amount in the year in which the DAF is established and funded. You may use cash or appreciated securities to fund the DAF.
There are various ways in which you might be a good fit for using a DAF. If you are a married couple filing a joint tax return is one example, with details as follows:
- A married couple projects their itemized deductions for 2020 and the next two years to be $22,000 annually, which consists of $10,000 per year of charitable contributions and $12,000 of other various itemized deductions.
- If they continue to pay their charitable contributions at the current amount of $10,000 per year, they will not itemize their deductions but instead continue to claim the standard deduction of $24,800 annually for a total of $74,400 of deductions over the three-year period.
- Let us assume the couple establishes and funds a DAF in 2020 for $20,000 in addition to their normal charitable contributions of $10,000 for the year resulting in total charitable contributions of $30,000 for 2020.
- The couple would receive an itemized deduction of $42,000 in 2020 ($30,000 charitable contributions plus $12,000 of other itemized deductions)
- In years 2021 and 2022 they would claim the standard deduction of $24,800.
- Their total deductions over the three-year period would be $91,600.
- This results in additional deductions of $17,200 over the three-year period.
- The couple will pay their charitable contributions for 2021 and 2022 from the DAF instead of using their personal funds.
While each of these methods are different, they are also beneficial in their own way, depending on your financial situation. Working with a qualified wealth manager can help you make the most of your giving and your tax savings!
These are some charitable contribution techniques that may benefit you as the donor. Please be aware that the charitable tax laws may be difficult to navigate and it is recommended that you consult with your tax advisor or wealth planner to verify how these opportunities may work in your specific situation.
2020 has brought about many challenges, but we are here to help you and your families make the most out of this giving season. Should you have any questions or comments on the techniques mentioned in this article please reach out to us at 855-855-5455 or firstname.lastname@example.org – we are always happy to have a conversation!