Thoughts on Year-end Giving
It has become an annual rite of sorts for many who are charitably inclined, that as the end of the year approaches, thoughts turn to shoring up their philanthropy through year-end giving. And since charitable contributions can many times have tax benefits, it makes sense to consider your giving in terms of how it fits into your tax planning.
The first thing you should do, especially this year, is consider whether to make contributions in the current year or wait and do so at the beginning of next year. There are a couple of considerations here.
First, due to the covid-19 pandemic, many people in 2020 find themselves with lower incomes than they have had in the past. It is possible that you find yourself in a lower tax bracket because of this, making a charitable deduction a little less valuable taxwise. If this is the case for you, but you expect your income to increase in 2021 and push you back up into a higher bracket, you may want to consider delaying the contribution until 2021 begins and take the deduction at the higher rate.
There is also the matter of the higher individual standard deductions we have had in the law the last few years. For example, the standard deduction for a single filer for 2020 is $12,400 and for married filing joint returns is $24,800.
Charitable deductions are considered itemized deductions. Because the standard deduction can be taken by anyone no matter what, you only benefit taxwise from itemizing to the extent that the sum of all your itemized deductions exceeds your standard deduction. Therefore, before giving at year end, you may want to consider whether you expect your total 2020 deductions to exceed the applicable standard amount. If not, consider delaying year end giving until 2021, where perhaps you can "bunch" them with your normal 2021 giving and other deductions, and possibly achieve a better tax result for the two years combined.
One additional thing to note is that under the CARES Act passed in response to the pandemic, you can deduct up to $300 in cash donations even if you do not itemize deductions.
Once you have determined when it's best for you to give, the planning doesn't stop. Consideration should be given to various ways to give that may benefit you. Obviously, outright cash gifts are the most common and the simplest way to give. But consider also the following alternatives that may yield greater tax benefits:
Donation of Appreciated Securities. As long as assets have been held for more than one year, donors can deduct the full appreciated value without paying any capital gains tax on the appreciation. The tax you avoid can be as high as 23.8% plus applicable state tax, and that's in addition to the tax savings from the donation itself.
Donor-Advised Funds (DAF). A DAF can be established at many financial firms and community foundations. The Arkansas Community Foundation and its local affiliates, for instance, use DAFs very effectively. As ARCF states on its website, www.arcf.org, "A donor advised fund is one of the easiest ways to make a charitable impact for the causes you care about most. Individuals can give to these types of funds and receive tax advantages while supporting nonprofits in their local community. Think of it like a dedicated account for charitable giving – you can donate to the fund for an immediate tax deduction and recommend grants to the charities of your choice when you're ready."
Contributions to a DAF can qualify for an initial upfront tax deduction even if you are not ready to pick the ultimate charity recipient. Indeed, a DAF can be used to bunch contributions as mentioned earlier to allow for itemizing in alternate years.
For example, the Jones normally give $10,000 a year to charity but because of the aforementioned standard deduction, when combined with their other itemized deductions, they rarely exceed their standard. What if instead, the Jones double up in late 2020 and give $20,000 to a local DAF. That amount represents their giving for 2020 and 2021, enabling them to itemize on their 2020 tax return and get some tax benefit from these outlays. They can spread out their "grants" to selected charities during 2021, effectively supporting those causes while taking the standard deduction in 2021. Then, they can start bunching again in late 2022.
Qualified Charitable Distributions (QCD). Another way to mix the standard deduction and charitable tax benefits effectively is the QCD available to people age 70 1/2 or older. A QCD is a direct transfer of funds, up to $100,000 per donor per year, from an IRA to a qualified charity. There is no charitable tax deduction for a QCD; the tax benefit comes from not owing tax on an IRA distribution. Thus, those making QCDs can fulfill their charitable intentions, reduce future tax on withdrawals from traditional IRAs, and still take the standard deduction or itemize, whichever is larger.
There are other effective giving strategies available primarily to higher net worth individuals that are beyond the scope of this article, but I will mention just the same; specifically establishing a charitable foundation trust (or private foundation), a charitable lead annuity trust (CLAT), and a charitable remainder unity trust (CRUT). These strategies can yield great tax advantages, but require the expertise of advisors skilled in the intricacies of their set up and operation.