MoneyDo: Understand Your Charitable Planning Options
It has been over to 100 years since a pandemic has impacted our society in the manner of COVID-19. It has impacted many of us financially and those without financial struggle are wondering how we can help. Churches, food pantries and other charitable organizations are counting on us more than ever. Are there ways to help these organizations and realize some tax advantages to doing so?
The CARES Act passed at the end of March and made a couple of changes to encourage more giving in this time of need. Here are the two changes you should know about:
- For those that itemize their deductions, the maximum deductible donation increased to 100% of income (Income defined as Adjusted Gross Income).
- A new $300 deduction that can be used along with standard deduction.
This week’s MoneyDo suggests reviewing your financial situation and if you choose to give, understand how to be “tax efficient” with your gifts.
To understand what this means, it is important to first understand the difference between itemized deductions and the standard deduction. For tax year 2020 the Internal Revenue Code (IRC) allows us to deduct from income the larger of the standard deduction ($24,800 for married couples) or the total of all other deductions (called itemized deductions). These include state and local taxes, mortgage interest, medical expenses and… charitable donations.
Normally we can deduct up to 60% of our income for cash donations. In 2020 we can deduct up to 100% of income. If you choose to take advantage of this change, we suggest meeting with your financial planner because there are other tax strategies that should be executed along with such a large donation. Taxpayers should note donor advised funds and supporting organizations are not eligible for these increased donation amount.
If your itemized deductions including your planned gift are smaller than the standard deduction, fear not. The CARES Act now allows a $300 “above the line” deduction for cash donations to charity. This means you can deduct up to $300 AND take the standard deduction. While this doesn’t seem like a larger amount, a $300 gift can mean a lot for worthy organizations.
While the CARES Act gave us some additional tax benefits in 2020 for charitable donations, there continue to be standard charitable planning strategies that can help maximize the tax efficiency of your donation:
- Donations of Appreciated Securities – by donating securities directly to a charitable organization or donor advised fund, you avoid recognizing capital gain and paying taxes on the sale of those securities; thereby eliminating a future tax if and when the securities would have been sold.
- Qualified Charitable Contributions (QCD) – once you are 70.5, you can direct up to $100,000 from your IRA, annually, to go directly to charity from the IRA custodian. In years when you have a required minimum distribution (RMD), the QCD will satisfy the RMD without having to recognize the amount as income. In years when there is no RMD (2020 is such a year due to the SECURE Act and CARES Act), you can use a QCD to further reduce the balance in your IRA to help decrease future RMD amounts.
- Donor Advised Funds – establishing a separate fund allows you to make donations to the fund so that you can “front load” several years of donations to ensure you are able to itemize. Then you can make distributions from the DAF to charities over a period of years.