New tax laws and strategies can help you maximize tax breaks for yourself and benefits for the charity.
By Kimberly Lankford, Contributor Aug. 21, 2020, at
10:15 a.m.
THERE ARE SO MANY reasons to make charitable gifts this year –
whether it's to support nonprofits that help people and communities with
challenges from the coronavirus pandemic, or to provide assistance after
disasters such as the Beirut explosion or an active hurricane season.
Even though a lot of people are struggling financially right
now, many people whose finances have stabilized want to do whatever they can to
help out. And they're not waiting until the end of the year to make their
gifts. "A lot of things are driving people to be generous, and our numbers
prove it," says Kim Laughton, president of Schwab Charitable, which runs
Schwab's donor-advised funds. From January through June 2020, its donors
recommended over $1.7 billion in 330,000 grants, almost a 50% increase in the
dollars granted and the number of grants compared to the same period in 2019.
"There's great need out there, and people are stepping up."
"Philanthropy and giving is on everyone's mind," says
Dien Yuen, who holds the Blunt-Nickel Professorship in Philanthropy at the
American College of Financial Services. Some nonprofits need help now just to
stay afloat. "The donors who are quite active are making gifts now and not
waiting until later in the year, because the nonprofit might not be there later
on."
New tax laws and strategies can help you maximize tax breaks for
yourself and the benefits for the charity. Here's what you need to know:
·
New $300 charitable
deduction for non-itemizers.
·
Bunching contributions
and donor-advised funds.
·
A double tax break
from giving appreciated stock.
·
Make a tax-free
transfer from your IRA.
·
Make an extra effort
to research charities this year.
·
New $300 Charitable
Deduction for Non-Itemizers
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, which fewer people do since the standard deduction doubled
a few years ago – now at $12,400 for single filers and $24,800 for married
couples filing jointly in 2020.
"As a result of the Tax Cuts and Jobs Act of 2017, most
taxpayers utilize the significantly higher standard deduction instead of
itemizing deductions for mortgage interest, state taxes paid and charitable
contributions," says Mark Alaimo, a certified public accountant and
certified financial planner in Lawrence, Massachusetts. "This special
CARES Act provision now gives a tax incentive to all taxpayers to give at least
$300 to charity during 2020." To qualify, the gift must be made in cash
and go directly to the charity, rather than to a donor-advised fund or private
foundation.
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"I think that the additional $300 provision in the CARES
Act is really great, especially for the younger generation who may be just
starting to work and may not be paying substantial mortgage interest,"
says Kelsey Clair, tax strategist for Baird's Private Wealth Management Group.
"It allows them to give even in a small way and reap the tax benefit for
it."
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.
"I see it in the older generation who have a lot of cash but don't have a
lot of income coming in and are trying to help out the community in any way
they can," says Clair.
Bunching Contributions and Donor-Advised Funds
Bunching contributions is a strategy that became popular after
the standard deduction was increased. Instead of making smaller charitable contributions
spread over several years, you can make larger contributions in one year so you
can itemize your deductions (and claim the charitable deduction) that year,
then take the standard deduction in the other years. "Rather than making a
steady stream of charitable contributions from year to year, it may be
beneficial instead to use a bunching strategy – give more and itemize in one
year, and claim the standard deduction in other years," says Clair.
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. You can usually open a donor-advised fund with an
initial contribution of $5,000 to $10,000 (it's $5,000 at Schwab and Fidelity,
$10,000 at T. Rowe Price, and $25,000 at Vanguard). You can make grants to
charities of $50 or $100 up to thousands of dollars or more, and you can invest
the money in a handful of mutual funds or
investing pools until you make the grants. "It can be a great way to go
ahead and make the contribution, without having to decide where that money goes
right away," says Clair.
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.
"Donor-advised funds really help with the administrative side of
things," says Elliot Dole, a certified financial planner with Buckingham
Strategic Wealth in St. Louis. "Itemizing charitable gifts is a hot button
audit area. But with a donor-advised fund, it's clear that you met the
requirements."
A Double Tax Break From Giving Appreciated
Stock
Many people just write a check to the charity, but you may get
a bigger 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. (Giving appreciated stock doesn't qualify for the special
$300 charitable deduction for non-itemizers for 2020; that only applies to
cash.)
Most charities can accept appreciated stock, but the process can
be easier if you have a donor-advised fund. "Given how volatile the stock
market can be, many advisors recommend utilizing donor-advised funds due to the
ease and speed that one can make a contribution," says Alaimo. "This
makes it easier to opportunistically gift highly appreciated securities, while
regulating which charity receives how much of the donation, and when they
receive it."
It's even easier if your brokerage account and
donor-advised fund are with the same company. "When you log into your
Schwab accounts, it shows your investment accounts, your bank accounts and your
charitable account," says Laughton. You can sort your investments by most
highly appreciated or highly concentrated and see if you're overweighted in one
area. "We encourage people to rebalance their portfolios regularly, and
when they see they're overconcentrated, instead of selling those shares, they
can just move them over to their charitable account," says Laughton.
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.
The donor-advised fund can also accept a variety of
contributions – whether you write a check or you give appreciated stock,
privately held stock, real estate, limited partnerships or even a horse farm.
"It always makes sense for people who have highly appreciated non-cash
assets to at least explore whether they could make good charitable gifts,"
says Laughton. "Donor-advised funds can make that simple and easy."
If you have investments that have lost value, however, it's
better to sell them first – and take a charitable loss – and then give the cash
to charity. "I've seen multiple times where people made mistakes of
donating stocks that were in a loss," says Clair. "It's better to
sell that and claim the loss on your return and donate the cash." When you
sell the losing stock, you can use the loss to offset your capital gains and
can use up to $3,000 in losses to reduce your ordinary income, which you
couldn't do if you gave the stock directly to the charity.
Make a Tax-Free Transfer From Your IRA
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.
(Even though the SECURE Act, another recent tax law, increased the age to start
taking RMDs from 70½ to 72, you can still make a qualified charitable
distribution any time after you turn age 70½.)
This is usually a great strategy for people who have to take
RMDs and would like to give money to charity – they can help the charity and
not have to pay taxes on the money they have to withdraw from their IRA. But
because of the CARES Act, people are not required to take RMDs in 2020.
However, you may still be able to benefit from making a QCD this year.
"Some people who have been doing the QCD have been supporting a couple of
charities every year, and they're not going to stop, especially during this
time of need," says Yuen. The tax-free transfer takes money out of your
IRA, which can help reduce future RMDs. "It's great planning," she
says.
To keep the money out of your AGI, it must be transferred
directly from your IRA to the charity – you can't withdraw it first. Ask your
IRA administrator about the procedure, and let the charity know the money is
coming. You have to give this money directly to a charity; it can't go to a
donor-advised fund.
Make an Extra Effort to Research Charities
This Year
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. Local
community foundations are also a great resource for aid focused on your
community – see the Community
Foundation Locator for links. If you have a donor-advised fund,
you may have access to additional research tools, such as GuideStar.
Schwab Charitable can help its donors vet the charities and also
provides lists of selected charities that focus on timely issues, such as
COVID-19 relief and social justice. "We're trying to develop short lists
to help people narrow the charities down to ones we know are valid and doing
good work," says Laughton.
https://money.usnews.com/money/personal-finance/taxes/articles/new-rules-for-charitable-giving
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