For many individuals, the holidays are a time for reflection and giving back. As we approach year-end and you evaluate your support to the charitable causes and organizations that are important to you, it is worthwhile to remember that there are many different tax strategies that can be beneficial as you plan out your charitable giving.
1. Above The Line Deduction for Standard Deduction Filers
In 2019, 87% of tax filers utilized the standard deduction , which increased due to the 2017 Tax Cuts and Jobs Act. Prior to the CARES Act, which was signed into law in March of 2020, taxpayers who took the standard deduction did not receive tax benefits for making charitable contributions. For tax year 2020, the CARES Act allowed filers who took the standard deduction to take an “above the line” deduction for cash donations of up to $300, regardless of filing status. In 2021 that amount has increased for married couples filing a joint tax return to $600, and has remained the same for all other filers. If you believe that you will be taking the standard deduction in 2021, you should consider donating cash to a qualified charity in order to take advantage of this above-the-line deduction. In order to qualify for this deduction, the donation must be made in cash and must be made to a qualified public charity. Donations to donor-advised funds or private foundations do not qualify for this deduction.
2. Cash Contribution Limitation of 100% of Adjusted Gross Income In 2021
Another change the CARES Act made to charitable giving was to increase the deduction limitation for cash gifts made to charities to 100% of Adjusted Gross Income (AGI) for tax years 2020 and 2021. Prior to the CARES Act, the limitation was set at 60% of AGI. To qualify for the increased limit, the donation must be made in cash and must be made to a qualified public charity. Donations to donor-advised funds or private foundations do not qualify for the increased limitation. The contribution limitation reverts back to 60% AGI in 2022. The 100% limitation is very beneficial for taxpayers who have a large amount of wealth and charitable intent but may not have much income, such as retirees.
3. Gifting Long Term Appreciated Assets
Gifting appreciated assets to charitable organizations can have significant tax advantages. Appreciated assets can include publicly traded securities, land, equity in a privately held business, works of art, etc. There are multiple benefits for donating appreciated assets. Since donating an appreciated asset does not trigger a sale for tax purposes, you get to avoid tax on the asset’s appreciation, which could be as much as 23.8% of the gain. The value of the tax deduction you receive from donating appreciated assets is equal to the assets’ fair market value at the time of the donation. The deduction for donating appreciated assets is limited to 30% of a taxpayer’s AGI. Any amount limited by this provision is carried forward for up to 5 years. In order to qualify for these benefits, you must have held the donated asset for at least one year. Also, if the donated asset is not a publicly-traded security, you may be required to have the asset appraised by a professional appraiser.
One popular charitable gifting strategy related to the above is donating appreciated securities to a donor-advised fund. Donor-advised funds are charitable organizations set up by a brokerage house or a community foundation. They allow taxpayers to donate appreciated securities to the fund and advise the fund on which charitable organizations receive the proceeds from the sale of the securities in the future. One benefit of utilizing a donor-advised fund is the ability to take a tax deduction in one year, but decide which charities you would like to support in later years.
4. Qualified Charitable Distribution From IRA
Taxpayers who are at least 70 ½ years old are able to make a Qualified Charitable Distribution (QCD) directly from their pre-tax retirement accounts to a charity up to $100,000. Amounts gifted via a QCD are excluded from a taxpayer’s AGI and can count towards a taxpayer’s required minimum distribution. This allows taxpayers to avoid including an RMD in their income and therefore enables them to avoid tax on the RMD.
These charitable giving strategies are just a few ways that taxpayers can donate to the organizations and causes that are important to them, as well as get a tax benefit from doing so. If you have any questions about how these or other charitable gifting strategies may fit into your tax plan, please reach out to a trusted member of the GBQ Tax Team.
Article written by:
Rob Roll, CPA
Manager, Tax & Business Advisory Services
Staff, Tax & Business Advisory Services