May 21, 2020

Edited 12/30/20

Charitable Giving for Tax Deductions

6 ways charitable giving can lower your taxes while helping others in need.

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If you are making charitable donations to organizations helping to respond to COVID-19, don’t forget to take advantage of your tax deduction. Whether it’s donating to a local food back or first responders organization, you can support your community and gain a tax break. Before you file your tax return, calculate your estimated tax and see how you can benefit from charitable giving.

As many are looking for opportunities to save more on taxes, opting towards charitable giving can be a tax-efficient strategy. There are other ways, outside of cash donations, to benefit from charitable giving.

Important TCJA Changes Strategy

The Tax Cuts and Jobs Act (TCJA) in 2017 made major changes that impact tax deductions from charitable giving. For example, the standard deduction for singles and couples increased to $12,000 and $24,400, respectively. In addition, state and local tax deductions are now capped at $10,000 and other itemized deductions have been eliminated. This will affect one’s charitable giving and tax planning strategy.

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However, there are other charitable giving strategies that preserve tax benefits. These strategies depend on your age and whether or not you’re required to take Required Minimum Distributions from your retirement accounts.

Naming a Charity as a Beneficiary

Instead of gifting your assets to a charity during your lifetime, you could designate the charity as the beneficiary of your retirement account or other assets such as real estate or life insurance policy. By designating the charity as the beneficiary, the charity – not you – will be treated as receiving the distribution. This means that neither you nor your estate will owe income taxes on the amount. While the amount will be included in your taxable estate, your estate will receive a deduction for the amount inherited by the charity, resulting in an offset for estate tax purposes.

To make this strategy a part of your plan, first, check with the plan administrator or financial institution acting as a plan custodian to determine if they have any restrictions on designating charities as beneficiaries for retirement accounts. If you are donating real estate, you may need to update your will as real assets typically do not have beneficiary designations.

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If you are considering donating life insurance, you should reach out to the life insurance company regarding restrictions on naming an organization as a beneficiary as opposed to an individual. You should also determine whether or not your spouse must consent to the designation. Failure to obtain spousal consent could result in a disqualification of the beneficiary designation. Lastly, be sure to discuss your decisions with family members and other individuals responsible for handling your financial affairs in the event of your death.

Donation of Appreciated Stock

Minimize taxes on your retirement income by donating appreciated stock or other investments from a taxable account to a charity. Despite the Tax Cuts and Jobs Act, appreciated securities still remains a powerful philanthropic tool for donors.

There are two advantages to donating appreciated securities rather than cash:

  1. By gifting appreciated stocks held for more than a year directly to a charitable organization, donors bypass the capital gains income tax if they were to sell the stock. 
  2. In addition, these stocks will be deducted at fair market value as itemized deductions rather than standard deductions.

Donor-Advised Fund

In addition, appreciated securities can be donated directly to a donor-advised fund (DAF). With a DAF, donors gift assets to the fund and receive the tax benefit at that time. The assets will continue to grow within the fund, giving donors the ability to grant monetary donations over a period of time.

Eligible assets like appreciated securities or cash are most commonly donated to DAFs. However cash is not recommended for tax purposes. Also, certain DAFs accept complex or non-publicly traded assets. These assets include closely-held stock (Limited Liability interests, private C- or S-Corp stock), land, life insurance, real estate, hedge fund interests, and even artwork.

Utilizing Qualified Charitable Distribution

Required minimum distributions (RMDs) from qualified retirement accounts are required when one reaches 72 and is no longer working. While RMDs have been eliminated for 2020 as part of the CARES Act, the expectation is that they will be back in place in 2021.  With the new standard deduction, a good tax strategy may be to gift all or a portion of the RMD directly to a charitable organization as a qualified charitable distribution (QCD). QCD counts towards your RMD and does not count as taxable income.

However, a QCD cannot exceed $100,000. For donors taking the standard deduction, reducing the taxable income created by the RMD is most often the most tax-efficient strategy.

CARES Act & Charitable Contributions

The recently passed CARES Act enacted changes to the deductibility of cash donations. Before the CARES Act, in order to get a deduction for charitable contributions, you needed to itemize your deductions on your return. The new law added the ability to deduct up to $300 in donations to a qualified charity even if you use the standard deduction.

For those with itemized deductions, the law removes the limit set at 60% of Adjusted Gross Income. Therefore, charitable contributions can now be deducted up to 100% of Adjusted Gross Income.

Charitable giving has always been a part of the American landscape where one can support a specific cause close to one’s heart. Now, more than ever, charitable giving is essential to all organizations affected by COVID-19. As you’re planning your future retirement income, charitable giving should be part of your estate, tax, and financial plan to benefit from tax incentives.

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