Charitable Giving: Now is the Time!
By David J. Haas CFP®
December 10, 2020
As we are closing out 2020, its time to reflect on a very challenging year. Many people have been hurt this year. You or one of your loved ones may have had COVID-19. A relative, friend, or colleague might have died or might be challenged as a COVID long-hauler. You or one of your loved ones might have lost your job or you might have been furloughed or lost income as a result of the pandemic. Altogether, this has been a challenging year.
My family has been lucky. Some family members had COVID-19 early in the year, but they have recovered and while we have had some job losses, those family members have bounced back. At the same time investments have recovered nicely after initial drop in the spring. Since my family and I have been luckier than many, I have been especially aware that this year, I need to give back. I hope you will join me.
Non-profits have been under a lot of stress this year too. There are a record number of people using food banks. Colleges have had tremendous challenges with a lot of extra costs and lower income. Trails in our parks have been degraded because hiking is one of the only forms of exercise with built-in social distancing. Non-profit opera, symphony, and other performing arts organizations have been devastated.
Taxes and Donations
The Tax Cuts and Jobs Act, President Trump’s signature tax cut has limited the ability of many people to deduct charitable donations because the act raised the standard deduction and limited deductions for state and local taxes to $10,000 (among other limitations). Luckily the CARES act at the beginning of this year added back the ability of taxpayers to deduct up to $300 of cash (not securities) donations. This change is for tax year 2020 only and the deduction applies whether or not you itemize your deductions. You must take advantage of this opportunity before December 31.
The CARES act also temporarily allows taxpayers to deduct up to 100% of their Adjusted Gross Income in tax year 2020 for cash donations. In tax year 2021 that figure reverts back to the normal 50%.
Ideas For Tax Efficient Donations
If you want to join me in charitable giving, here is a list of ways to do it which are the most income tax efficient:
CARES-act $300 donation – You should make this donation by check or credit card and keep your receipt. Like any tax-deductible donation, no goods or services must be received as part of the donation.
Qualified Charitable Distribution – The QCD is a donation you can make from an IRA if you are over 70 ½. The limit is $100,000 per year and the funds must be directly transferred to the charity (a check made out to the charity directly from the IRA may suffice). The charity needs to cash the check this year for the QCD to count for 2020 if you send the check to them yourself. For maximum tax benefit, use a traditional, SIMPLE, or SEP IRA and not a ROTH IRA or an IRA with post-tax contributions. You do not have to pay tax on the distribution, which normally would have been taxable at ordinary income rates, but you will not be able to deduct the contribution. The nice thing about the QCD is that you don’t need to worry about itemizing your deductions to get the tax benefit.
Donate Appreciated Securities – This is a great way to get a tax benefit if you have stock which you would owe a lot of long-term capital gains tax on if you sold it. If you donate the stock directly to a charity (or a Donor Advised Fund), you won’t have to pay capital gains tax on the sale of the stock and at the same time you can take a tax deduction for the value of the stock being donated. You should choose stock (or other securities) with a low tax basis to get the maximum value. You also should keep in mind that you can only deduct 30% of your Adjusted Gross Income in any tax year, although there is a 5-year carry forward provision that allows you to use any unused deduction in future years. You will need to itemize deductions to take full advantage of this technique.
The next question to answer is which charities do you want to donate to. Charities vary a lot in their effectiveness and there are a few out there which are downright scams. Look for part 2 of this article for donation ideas and how to avoid scams. Advice on charitable giving is just one of the ways we help our clients at Cereus Financial Advisors. If you are not our client, give us a call to see you we can help you.