Charitable giving not only improves the lives of others but has been shown to increase happiness more than personal spending on oneself.[1] Additionally, improved happiness and health have been linked to reduced rates of stress and lower blood pressure.[2] To make your giving the most thoughtful, ask yourself these questions.
Which Charity?
We recommend finding a charity that aligns with your values. Begin by searching for charities that help causes that are important to you. Searching on websites like https://www.myphilanthropedia.org/, http://www.givewell.org/ and https://greatnonprofits.org/ can provide details about how the charity uses the donations. After finding a few charities that inspire you, we recommend scheduling on-site visits to your top charities and interviewing managers involved with the charity before making any significant gift. If time allows, volunteering is a great way to get to know the charity from the inside. You will have the chance to see firsthand how they run their business and whether they accomplish their stated goals. You might even ask your children and grandchildren to volunteer with you for a few hours to share in the benefits of giving back and create lasting family memories. Community foundations are another good way to get connected to local charities as the staff can provide further details of charities working for causes you may want to support.
How did the Coronavirus Stimulus relief packages change charitable giving for tax purposes?
There is now a new above the line charitable deduction for certain cash charitable contributions; in 2021, the limit for single filers is $300 and the limit for married taxpayers is $600. Secondly, in 2021 taxpayers itemizing deductions may deduct up to 100% of AGI for qualifying cash contributions, potentially eliminating all tax liability through charitable donations. A qualified charitable contribution in this regard is a cash contribution made in 2021 to a qualified tax-exempt organization, which does not include supporting organizations or donor advised funds. Note that charitable cash contributions carried over from a prior year are not eligible. Any excess qualified contributions are carried forward for five years in the same manner as other charitable carryovers.
What if I currently take the standard deduction?
Donations to 501(c)(3) charities result in an itemized deduction, which reduces taxable income for taxpayers who itemize. The Tax Cuts and Jobs Act of 2017 (scheduled to expire 12/31/2025) increased the standard deduction to $12,550 for single filers and $25,100 (2021) for married filers. For charitable donors, the best way to give might be to switch from giving annually to giving every few years. “Bunching” two- or three-years’ worth of charitable donations into one year might result in itemizing deductions in that year while taking advantage of the now higher standard deduction the other years (see example of married filers in the chart below). Cumulatively, this results in greater tax deductions which translate to tax savings. If you would like to bunch gifts for tax purposes but benefit the charity over time, consider using a donor advised fund (discussed below) which allows you to take the charitable deduction in the year of the gift, but allows you to make distributions to the charities over time.
What to give considering taxes?
Most gifts to qualified charities, except for the gift of time, qualify for a deduction for taxpayers who itemize. The most common gifts are cash or check, highly appreciated stock and personal property (including clothes, furniture, books, etc.). But other property such as highly appreciated real estate, cars, old life insurance policies and qualified direct distributions to charity from retirement plans make attractive giving options as well.
If you are over age 70½, maybe the best place to donate from is your IRA, which can also satisfy required minimum distributions (RMD) called a qualified charitable distribution or QCD. You can donate up to $100,000 annually from an IRA directly to a qualified public charity (not a private foundation, donor-advised fund, or supporting organization) to both satisfy your charitable goals and prevent the distribution from being included in your taxable income. You do not have to itemize to take advantage of the benefit of donating from your IRA. Making a direct donation from your IRA lowers your income and may even allow you to qualify for lower Medicare premiums and other income tax breaks. Also, note that contributing to an IRA after age 70 ½ reduces the amount transferable to a charity as a QCD.
Long-term capital gain assets like highly appreciated real estate or company stock held for more than one year are great assets to donate. Not only do you get the benefit of a charitable tax deduction, you also avoid paying tax on the capital gain i.e., the difference between your cost basis and the current market value. Many business owners about to sell their company donate a portion of their company stock to charity before entering into a letter of intent for the potential sale. When structured properly, the business owner may take an income tax deduction (hopefully in the same calendar year when adjusted gross income (AGI) is high) of the fair market value of his or her company stock donated without having to pay tax on the capital gain. Note that if you give a large donation of long-term capital gain assets to qualified public charities, the amount of the income tax deduction is the fair market value of the asset but is limited to 30% of your AGI. A special election can be made for long-term capital gain assets that would allow you to deduct up to 50% of AGI however, it would be based on the adjusted cost basis of the asset donated. Any excess amount donated not currently deductible can be carried forward for up to five years.
For gifts of cash, inventory or short-term capital gain property to qualified public charities the amount of the deduction is the adjusted cost basis of the asset but is limited to 50% of your AGI (60% of your AGI for cash gifts). These limits are based on gifts to qualified public charities, some supporting organizations, and private operating foundations. Note in 2021 per the Coronavirus stimulus changes discussed above, the AGI limit on certain cash donations is 100%.
If you have a life insurance policy that you no longer need, consider the leverage of donating it to charity. Life insurance policies are advantageous to give because they do not affect your cash flow as an out-of-pocket expense, you get a current income tax deduction (assuming you itemize) and the eventual benefit to the charity is usually much greater than your previously incurred cost. A donation of a life insurance policy to a qualified public charity can yield a current income tax deduction of the adjusted basis in the policy, limited to 50% of AGI. In order to take advantage of the current income tax deduction, you must irrevocably assign all incidents of ownership to the charity. Donations to pay any future premiums should be made to the charity and are also income tax deductible (assuming you itemize). The donation of a life insurance policy to a charity should be carefully coordinated by your CPA, insurance company and charity to ensure the charity retains an insurable interest in the donor insured and that the absolute assignment of all rights in the policy has been made.[1]
Large donations to private charities, like private foundations or certain fraternal organizations, are subject to lower limitations. Specifically, for long-term capital gain property, the deduction is the fair market value of the assets donated limited to 20% of your AGI rather than 30%. For short-term capital gain property and cash the deduction is the adjusted cost basis on the assets donated limited to 30% of AGI rather than 50% or 60% for public charities. To determine the deductibility status of the charity you are considering donating to, visit the IRS website https://apps.irs.gov/app/eos/.
Have You Considered Alternate Ways of Giving?
The simplest way to give to charity is by giving directly to the charity. However, putting thought into the way you give can create flexibility. To make a charitable donation with a lasting impact, consider using a donor advised fund (DAF). DAFs allow you to get a charitable tax deduction in the year you make the contribution, while allowing you to stretch the gifts to charities over your lifetime. From your DAF you have the flexibility to set up auto payments to your church or any qualified charity, or simply make a gift once a year. You can also share the joy of giving with others by allowing them to direct a donation to a charity of their choice from your DAF. DAFs are inexpensive to set up with a minimum initial contribution of typically $5,000. The contributions can be invested, so even a little can go a long way. Keep in mind, just like any charitable donation, there can be no quid pro quo (the donor cannot receive anything in return for the gifts) and a DAF cannot distribute to a charity to satisfy a personal pledge.
Charitable trusts are another way of giving for donors who want to retain income or provide an amount to heirs from the asset. Charitable remainder trusts provide an income stream to the donors for a set term of years or throughout their lifetimes and ultimately leave the remaining assets to a charity. A charitable lead trust pays income to a charity during the donor’s lifetime and the remaining assets are passed to the heirs of the donor. Charitable trusts are not as popular as they once were for several reasons: there are significant costs to establish and maintain the trust, the tax law change in the late 1990’s requiring more be paid to the charity, there is a lower tax deduction than an outright gift, and the recent period of low interest rates yield minimal income to donors from a CRT.
Everyone Can Give
Even if you don’t have highly appreciated stock or much cash to give, making simple gifts of time, old clothes, or weekly donations to your church will still go a long way. We encourage you to enjoy the gift of giving by incorporating philanthropy into your life.
[1] https://news.harvard.edu/gazette/story/2008/04/money-spent-on-others-can-buy-happiness/
[2] http://www.sciencedirect.com/science/article/pii/S0167876006001917
[3] http://www.pgdc.com/pgdc/life-insurance-charitable-planning-tool-part-i
Important Disclosure: Beacon Pointe Advisors does not offer legal or tax advice. Please consult with the appropriate tax or legal professional regarding your circumstances. This information is not intended and should not be relied upon as individualized tax, legal, fiduciary, or investment advice. Only a tax or legal professional may recommend the application of this general information to any particular situation or prepare an instrument chosen to implement any design discussed herein. Nothing herein should be relied upon as personalized investment advice, nor should it be considered an individualized recommendation, offer or solicitation for the purchase or sale of any security or to adopt a specific investment strategy. An investor should consult with their financial professional before making any investment decisions.
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