Existing tax laws, the CARES Act, and election
year uncertainty make it wise to be generous now in support of extraordinary
needs
August 28, 2020 By Kim Laughton
This year, we are living
through a once-in-a-lifetime global pandemic, significant market volatility,
and growing social concern and unrest. Despite these uncertain times, we are
also witnessing truly historic levels of generosity from individuals who have
significantly increased their giving to support those who have been most
impacted by this challenging environment.
Schwab Charitable donors
and their advisers have stepped up and responded in remarkable ways. During the
first half of 2020, we saw a 46% increase in dollars granted and a 44% increase
in the number of grants to charities compared to the prior year.
Other donor-advised funds have
reported similar increases, and research has shown that giving from
donor-advised funds tends to be resilient during economic downturns because
dollars have already been set aside for a charitable purpose.
In addition, even with the
recent market volatility, the S&P 500 index has roughly doubled in the last
eight years and existing tax laws continue to encourage giving, providing
additional benefits for clients who give appreciated noncash assets. Annual
income tax deduction limits for gifts to public charities, including
donor-advised funds, are 60% of adjusted gross income for contributions of
cash, 30% of AGI for contributions of noncash assets held more than one year,
and 50% of AGI for blended contributions of cash and noncash assets. Donation
amounts in excess of these deduction limits may be carried over up to five tax
years.
New tax incentives for
charitable giving in 2020 came in March with passage of the CARES Act, which
gives taxpayers who plan to take the standard deduction the option to claim an
above-the-line deduction of up to $300 for cash contributions to operating
charities. The CARES Act also gives donors who will itemize deductions an
option to elect a 100% of AGI deduction limit for cash donations, and deduction
amounts above this limit may be carried over for up to five years. With both
options, the cash donations must be made directly to operating charities and
cannot go to donor-advised funds, supporting organizations, or private
foundations.
HOW TO HELP CLIENTS GIVE
While extraordinary needs
will persist into 2021, the tax benefits of charitable giving may change after
the presidential election, as the current administration and previous five
administrations have overseen significant changes to the tax code. As clients
contemplate how they might respond to the uncertainty of these unprecedented
times during the remainder of 2020 and beyond, a few strategies are worth
considering to help make their charitable giving both tax-smart and
high-impact.
GIVE APPRECIATED NONCASH ASSETS
For clients who itemize
deductions, appreciated noncash assets, such as stocks, ETFs and mutual funds
held more than one year, may offer an additional tax benefit in comparison to
cash donations. Beyond claiming a deduction for the fair market value of an
asset, clients can potentially eliminate the capital gains tax they would incur
if they sold the asset and donated the cash proceeds. This can mean even more
going to charity and less to taxes, as shown in the example below.
The example above does not
take into account any state or local taxes or the Medicare net investment
income surtax. The tax savings shown is the tax deduction, multiplied by the
donor’s income tax rate (24% in this example), minus the long-term capital
gains taxes paid.
TAKE ADVANTAGE OF CHARITABLE DEDUCTION RULES,
BUNCHING OPPORTUNITIES
Give up to and beyond
existing limits and carry over the excess deduction. Donors
who wish to itemize deductions for noncash assets, cash, or a combination of
both may choose to give beyond the deduction limit and carry over the excess
deduction for up to five years.
Bunch contributions. Some
clients may find that the total of their itemized deductions is just below the
level of the standard deduction. They may find it beneficial to bunch 2020 and
2021 charitable contributions into one year (2020), itemize their deductions on
2020 taxes, and take the standard deduction on 2021 taxes. In addition to achieving
a large charitable impact in 2020, this strategy could produce a larger
two-year deduction than two separate years of itemized charitable deductions,
depending on income level, tax filing status and giving amounts each year.
Clients who bunched two or
more years of contributions in 2019 and will subsequently take the standard
deduction for 2020 may also consider taking the CARES Act’s $300 deduction for
cash donations made to operating charities.
GIVE MORE BY LOOKING AT RETIREMENT ASSETS
Make a qualified charitable
distribution of IRA assets. Whether they’re itemizing or claiming the
standard deduction, individuals age 70 ½ and older can direct up to $100,000
per year tax-free from their individual retirement accounts to operating
charities through QCDs. By reducing the IRA balance, a QCD may also reduce the
donor’s taxable income in future years, lower the donor’s taxable estate and
limit the IRA beneficiaries’ tax liability.
Use a charitable deduction
to help offset the tax liability of a retirement account withdrawal. Those
over age 59 ½ (to avoid an early withdrawal penalty) who take withdrawals from
retirement plan accounts in 2020 may use deductions for their charitable
donations to help offset income tax liability on the withdrawals. As with the
above strategy, this offers the additional benefits of potentially reducing a
client’s taxable estate and limiting tax liability for account beneficiaries.
Convert retirement accounts
to Roth IRAs. Clients who have tax-deferred retirement accounts, such as
traditional IRAs, can use charitable deductions to help offset the tax
liability on the amount converted to a Roth IRA. The
primary benefits of a Roth IRA are tax-free growth, potentially tax-free
withdrawals (if holding period and age requirements are met), no annual
required minimum distribution, and the elimination of tax liability for
beneficiaries (depending on the timing). Financial advisers are well-positioned
to help clients determine whether these benefits make sense for their individual
situation.
WHAT TO DO NEXT
Advisers play an important
role in helping their clients plan tax-smart giving that can increase a
client’s charitable impact. At Schwab Charitable, three-quarters of
donor-advised fund account assets are associated with a professional investment
adviser.
There are plenty of
resources and tools available online and in communities to help advisers
throughout a client’s philanthropic journey. These include assistance with
defining a charitable mission to making tax-smart account contributions,
investing account assets for tax-free potential growth, and researching
charities for grant recommendations.
A few potential starting
points include the following:
·
Charities recommended by
the Center for Disaster Philanthropy for COVID-19 relief.
·
A search tool for
identifying community foundation-sponsored COVID-19 funds across the U.S.
·
Schwab Charitable’s Giving with Impact podcast, where leading
voices from across the charitable ecosystem engage in conversations about
achieving more effective philanthropy.
Kim Laughton is president
of Schwab Charitable.
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