Philanthropy and giving is on most of our minds as we wrap up the pandemic year of 2020. Nonprofits need help now just to keep their doors open. New tax laws and strategies can help you maximize tax breaks for yourself and have benefits for the charity. Here's what you need to know:
The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, created several incentives for people to help charities right away, including a charitable deduction of up to $300 in 2020, even if you don't itemize. Otherwise, you generally need to itemize to take the charitable deduction. The CARES Act also helps people who are in a financial position to make very large gifts. In 2020, you can deduct cash gifts of up to 100% of your adjusted gross income, rather than the usual 60% limit. To qualify for this higher limit, the gifts must go directly to the charities, rather than to a donor-advised fund or private foundation. This can help wealthy people reduce their taxable income significantly in 2020, and it may also help retirees who have money to give but bump up against the income limits for the deduction.
Bunch Contributions and Donor-Advised Funds
Rather than making a steady stream of charitable contributions from year to year, it may be better to use a bunching strategy – give more and itemize in one year, and claim the standard deduction in other years. Even though this can help you tax-wise, you might not want to give all of the money to the charities at one time and then neglect them over the next few years. But bunching can work well if you have a donor-advised fund. These funds are offered by brokerage firms, banks and community foundations, and you can take the charitable deduction in the year you give the money to the donor-advised fund, but then you have an unlimited amount of time to decide which charities to support. Another benefit of the donor-advised fund is simplicity – you get one receipt for your tax records when you make the contribution and don't have to wait for a variety of paperwork from each of the charities.
Give Appreciated Stock
Many people just write a check to the charity, but you may get a larger tax benefit if you give appreciated stock. If you owned the stock for more than a year, you can deduct the value of the stock on the date you give it to the charity if you itemize. And even if you don't itemize, you can avoid having to pay long-term capital gains taxes on your profits, which could have cost up to 20% if you sold the stock first. With so much stock market volatility this year, you may want to donate the stock when it reaches a target price, rather than giving at a certain time of year.
Tax-free IRA Transfer
People who are age 70½ and older can give up to $100,000 per year tax-free from their IRA to charity, a procedure called a qualified charitable distribution or QCD. The gift counts as their required minimum distribution but isn't included in their adjusted gross income.
Research Your Charities
Scam artists have been out in full force to take advantage of the coronavirus pandemic. It's even more important now to check out charities before you give money, especially if they contact you first. You can look up charities at sites such as Charity Navigator and the Better Business Bureau's Wise Giving Alliance.
With so many options for giving, be sure to check with your financial advisor, Brien Smith, at Brien@traditionswealthadvisors.com or 979-694-9100, before finalizing your gift.
Source: Lankford, Kimberly. 21 August 2020. US News. https://money.usnews.com/money/personal-finance/taxes/articles/new-rules-for-charitable-giving