Charitable Giving Strategies That Go Beyond Simple Check Writing
In this season of giving, you may be feeling more inspired than ever to donate to charity. The COVID-19 pandemic has left many people hurting, with more than 200,000 unemployed in Colorado alone. But what are the best ways to give? You could always write a check—or more likely these days, donate online or via an app. But before you write that check or open that app, take a look at these charitable giving strategies that can help bring comfort to others while saving you in taxes.
Philanthropy and Your Tax Deduction
You can make the most of your last-minute charitable gifts to nonprofits in 2020 courtesy of the CARES Act, the pandemic relief bill.
After the Tax Cuts and Jobs Act increased standard deductions three years ago, fewer people have been taking charitable deductions since they are no longer itemizing. However, this year, the CARES Act has tried to make charitable giving more attractive by boosting the tax benefits.
Even if you use the standard deduction, you can take an above-the-line $300 deduction for your cash contributions to charity.
For itemizers, you normally can deduct 60% of your adjusted gross income (AGI) for charitable contributions. But because of the CARES Act, you can deduct up to 100% of your AGI for cash contributions on your 2020 tax return, potentially adding up to significant tax savings.
This is an excellent incentive for itemizers with the desire to give more. The deduction can also prove helpful if you completed a Roth conversion this year. When you choose to convert a traditional IRA to a Roth, you owe taxes on the amount you convert. For 2020, at least, your charitable deduction can help mitigate the amount of taxes you pay in the conversion.
Qualified Charitable Distributions
If you are 70 ½ years of age or older, you might consider making a qualified charitable distribution (QCD). A QCD is typically used to offset a required minimum distribution (RMD). The CARES Act waived the RMD rule for 2020, but you may still find a QCD useful for donating to your favorite causes.
With a QCD, you can distribute up to $100,000 from your IRA to an eligible nonprofit. This can help reduce your AGI, which calculates Social Security taxes and Medicare charges. It can also reduce your tax-deferred balances for next year’s RMD.
A qualified nonprofit is limited to public charities. QCDs to private foundations or donor-advised funds are not allowed. To find a charity, you can use a nonprofit database such as GuideStar. And keep in mind that the QCD must be made directly from your IRA custodian to the charity, rather than made through you.
Highly Appreciated Assets
Perhaps you are thinking of selling highly appreciated assets like stocks and using the funds to support a charity, But by selling the assets yourself, you will end up owing capital gains taxes. Thankfully, you have an alternative.
Giving the asset directly to the nonprofit will save you capital gains taxes, allowing you to make a bigger impact. You can deduct up to 30% of your AGI on the fair market value of your appreciated assets if you’ve held the investment for a year or more.
Given that we are so close to year-end, consider talking with a fiduciary financial advisor to determine if this strategy is viable for 2020, as the donation can take a couple of weeks to process. Even if you can’t use this strategy for 2020, you can always keep it in mind for next year.
Donor-Advised Funds
Donor-advised funds (DAFs) can be a great way to support your philanthropy even if you don’t know which nonprofit to give to at the moment. With a DAF, you can contribute cash and other assets, and you will get a tax deduction for the year in which you make the contributions. You can then make grants to nonprofit organizations on your own timeline.
A DAF is also useful for the “bunching” strategy in which you combine several years of contributions into one year. The goal of bunching is to allow you to contribute enough to itemize. You then use the DAF to make grants in the years you don’t fund the account. When you are ready to itemize again, you repeat the process.
Talk to a Financial Advisor
You may be thinking, “These are all great strategies, but which one is right for me?” It can be helpful to talk with a fee-only financial advisor. Our Greenwood Village, CO retirement planning firm helps clients with philanthropic planning as part of their overall financial plan.
If you work with an advisor, look for one who will help you select giving strategies based on your overall financial picture and life goals. We recommend a fiduciary, fee-only financial planner so that you can feel confident that their advice really does put your best interest first.
Discuss your situation with a fee-only financial advisor. Schedule a complimentary discovery call.
This material was prepared by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax or legal advice.
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