This year has been challenging for people, no matter their means or situation. As we approach the holiday season (and the end of the tax year), many of you may be considering increased charitable giving to organizations you support, or you may be concerned about maintaining the level of giving you have targeted in past years. In both cases, reviewing your options thoughtfully can reveal opportunities to make your giving more impactful to recipients while also lightening your tax burden.
Types of Giving
Often donors find it easiest to write a check to the charity of their choice. It’s an immediate, satisfying way to provide direct monetary support without significant paperwork. For taxpayers who itemize their deductions, this option is particularly attractive this year: the CARES Act increased the available deduction on qualified charitable contributions from 60% of adjusted gross income (AGI) to a full 100% of AGI. Cash contributions must be made to public charities to qualify, so keep in mind that contributions to most family, corporate, and private foundations will not meet the requirements for this incentive.
Giving Appreciated Shares of Stock or Mutual Funds
According to the 2016 Fidelity Charitable Giving Gap Report, 80% of charitable donors have appreciated assets, but only 21% of these donors have contributed this type of asset to charity, missing out on the tax-efficiency of this method over cash gifts.
Let’s assume you’re in the 37% federal income tax bracket and hold shares valued at $50,000 that you originally purchased several years ago for $20,000. If you sell those shares yourself to donate cash to a charity, the long-term unrealized gains of $30,000 will be subject to the 20% capital gains and 3.8% Medicare surtax, resulting in a cash gift of $42,860 (after taxes of $7,140 are paid). In contrast, donating those assets directly to the charity provides the organization with the full $50,000 value of the shares while also increasing your income tax deduction. It’s important to note the maximum deduction for giving appreciated securities is 30% of your AGI versus 100% for cash in 2020. If your gift of stock exceeds this limitation, the excess amount can be carried forward for up to five more years.
Contribute to a Donor-Advised Fund (DAF)
If you experienced an unusual increase in income this year and have the means to make a large charitable contribution to offset a portion of your anticipated income tax burden, then contributing to a donor-advised fund may be the right option for you. DAFs are unique charitable giving vehicles that allow you to contribute cash, appreciated assets, or even more complex holdings such as real estate. The assets are then held separately from your estate, allowing you to recommend grants to the charities of your choice over time. In the meantime, the funds can continue to appreciate without incurring additional tax liability on the growth, as you no longer ‘own’ the holdings. This method can also be used as a learning tool, allowing future generations of your family to learn about the importance and value of charitable giving. By involving them in the process of contributing and recommending grants, you can help instill them with a sense of your charitable legacy.
A DAF is established through a public charity, so you can receive an immediate charitable tax deduction when you exceed the standard deduction threshold and itemize taxes. Under current tax laws, charitable deductions are limited to 60% of adjusted gross income (AGI) for cash gifts to the DAF or 30% of AGI for long-term appreciated assets (e.g., stock) to the DAF.
Qualified Charitable Distributions (QCDs)
While the CARES Act waived the Required Minimum Distribution (RMD) for many retirement accounts this year, individuals are still allowed to use these accounts to make qualified charitable distributions. These QCDs are created when you request that a withdrawal from your account be sent directly to a charity (or several charities) of your choice. In a typical year, this allows you to meet your distribution requirement and not recognize this income as taxable, since it’s a direct donation to charity.
As with any similar tax incentive, there are some limits on how to implement a QCD. The contribution must be made by an individual over age 70 1/2, and individuals are limited to a maximum of $100,000 in qualified charitable distributions per year. Rather than receiving the distribution as income and itemizing the contribution as a deduction, the QCD goes straight to the charity and is not included in your gross income.
If you’d like to talk with us about which of these giving strategies best suits your situation and goals for this year, please feel free to reach out! The more efficient your giving can be this year, the greater your impact will be on the charities and causes you value most.