These include people who are struggling with job losses, overdue bills, and/or increased expenses and those who are basically “financially unscathed” with continued income, reduced expenses (e.g., no commuting, childcare, and/or travel), and/or no investment losses (unless they panic and sell securities in a down market).
Toward the end of each year, interest in tax-advantaged philanthropy to help those in need often increases. There is some evidence that donors plan to give more this year in response to COVID-19 and social justice issues. Many charitable organizations are in desperate need of funds after their 2020 fundraising events were canceled.
A key point to remember is that how and what you give is as important, perhaps even more so, as the dollar amount involved.
With a 2020 standard deduction of $12,400 for singles ($13,700 at age 65 and up) and $24,800 for married couples filing jointly ($27,400 if both spouses are age 65 and up), it is much more difficult for those who contribute to charities to see a direct tax benefit, as the standard deduction is often higher than the amount one would save in taxes by itemizing.
Below are three strategies to help those in need and also receive a tax benefit for your charitable contributions:
Establish a Donor Advised Fund
I did this myself this year, and it was super easy. First, you select a Donor Advised Fund (DAF) custodian such as Schwab, Vanguard, Fidelity, or TIAA by reviewing their portfolio investment options and expenses. Next, select an asset allocation for your deposit and make a tax-deductible contribution.
Typically, you’ll want to contribute more than the standard deduction amount to gain the ability to itemize deductions, including the DAF deposit. This is often referred to as a “bunching” strategy, in which people plan to be able to itemize every few years or so.
Lastly, follow the custodian’s procedures to make grants to charities from your account at any time. The custodian makes sure the charity is tax-qualified and sends out a check.
Donate Appreciated Securities
Consider gifting appreciated securities to charities instead of cash. Securities, such as bonds or stock or mutual fund shares, can be transferred directly to charities or placed within a DAF for greater flexibility as to the timing and recipients of charitable gifts.
Donors can claim the fair market value of the gift on their income tax return and avoid paying capital gains tax on the gifted amount.
This can save a considerable amount of taxes if securities were held a long time and grew significantly. Charities also receive more than if donors sold shares and donated the after-tax proceeds.
Qualified Charitable Contributions
Donors starting at age 70½, with traditional IRAs, can donate up to $100,000 to qualified charitable organizations directly from their IRA(s). This is called a qualified charitable distribution (QCD).
Withdrawals for charitable donations are not counted as taxable income and can be used to comply with required minimum distribution (RMD) tax rules for traditional IRAs that begin at age 72.
Charitable contributions must be sent directly from an IRA account custodian to a qualified charity in order to qualify for a QCD. Account owners cannot take possession of the money. All IRA distributions are reported to IRA account owners and the IRS on Form 1099-R and QCDs should not be included in taxable income.
Another Option For Donations
There is one more way to give to qualified charities and save on income taxes for tax years beginning in 2020: As a result of the CARES Act, there is a $300 deduction allowed for non-itemizers. This is often referred to as an “above the line” deduction because it is an adjustment made before determining adjusted gross income.
The Bottom Line
To summarize, it is still possible to receive tax benefits for charitable donations. Donating to charities is a win-win-win for all involved. Donors reduce their income taxes, charities receive desperately needed income, and clients of charities receive much needed support, especially during these challenging times.
There is still time to make arrangements for any of the charitable donation strategies listed above. Every small step that people take to help others this holiday season will make a difference.