Questions to Consider:
- Are you planning to give to charity on an annual basis?
- Do you want to increase your itemized deductions to surpass the standard deduction?
- Are you expecting a high-income year, which could move you into a higher marginal income tax bracket?
- Do you own long-term appreciated securities in a taxable account?
The Tax Cuts and Jobs Act of 2017 makes it more important than ever to make sound financial decisions about charitable giving. With some additional planning, you may be able to increase the amount you give to charity while helping to reduce your tax exposure.
If you are not sure how your finances match up with your upcoming year-end giving strategy, now is the time to prepare yourself by making your lists and checking them twice. Organization is key in order to properly give this holiday season. Follow the four tips below to maximize your charitable giving strategy in 2021.
1. Do Your Research
By using sites such as Guidestar or the Better Business Bureau’s Wise Giving Alliance, you can learn more about the organizations you are interested in supporting.
In order to receive the tax benefit, the organizations you are considering must be nonprofits that fall under the 501(c)(3) tax code. You may also use the tax-exempt organization search tool available on the IRS website to obtain specific information as well.
2. Bunch Your Donations
As standard deductions have increased, you may choose to save money over time and bunch all of your donations into one year by utilizing a Donor Advised Fund (DAF), as opposed to spreading them out year by year. By doing this, you have the benefit of itemizing deductions one year, and taking the standard deduction the following few years.
If you’re interested in accomplishing this, a DAF allows you to immediately receive a tax break when you contribute to the account. You can then use this fund over future years to send out donations. We like to call this your charitable “piggy bank.”
Here’s a Hypothetical Example
Anne, a single / individual tax filer, typically gives $5,000 to charity each year. She expects to claim an additional $7,200 in other itemized deductions.2 Due to a sizable bonus this year, Anne thinks she will be subject to a higher income tax rate.
- Strategy #1 shows Anne's estimated tax savings if she continues to give $5,000 annually in cash. Even with other itemized deductions, Anne is unable to exceed the standard deduction of $12,200 and will not receive any additional tax savings.
- Strategy #2 shows Anne's potential tax savings if she gives five years’ of charitable contributions in this high-income year. By giving the full amount in appreciated securities from her taxable account, Anne eliminates the capital gains tax and benefits from significant income tax savings. If she uses a donor-advised fund, these assets may grow over time—tax-free—and increase her charitable impact. 3. Donate Appreciated Stock
- We have experienced some strong stock market returns over the last two years (the S&P 500 Index is up 42% since January 1, 2020) . You may want to consider taking advantage of these gains by donating appreciated securities to your DAF.
Gifting certain appreciated assets can also provide more “bang for the buck. ” You may not only get an income tax deduction based on the fair market value of the donated asset, but you also avoid paying capital gains tax on that asset’s unrealized appreciation. Clients should realize the full benefit of a tax deduction in the current calendar year, which could be helpful if there has been a spike in income.
4. Utilize Your IRA
If you’re a retiree over the age of 70, you might consider transferring money from your IRA to a qualifying charity. These distributions can be a tax-efficient way of meeting any required minimum distributions (RMDs). Additionally, there’s no need to itemize your deductions in order to benefit.
According to the National Association of Enrolled Agents, you may distribute up to $100,000 per year per taxpayer. This increases to an acceptable $200,000 for married couples if you both have IRAs.2 Although this strategy has existed for some time, it only recently became a part of the permanent tax code.
Please let us know if you would like to review your charitable giving in context with your broader financial plan.