The end of the year is a very popular time to give to charities. There are many deserving organizations out there that could use your help, especially in light of the challenges we’ve all faced during the COVID pandemic. While your primary goal in giving to charity should be finding a cause that is important to you, there are many tax advantages to charitable giving that should also be considered. Some of these rules have changed in recent years, so we thought we’d highlight a few things you should be thinking about as you do your 2021 year-end giving.
Don't Miss the Above-the-line Deduction - For 2021, everyone is eligible for an above-the-line deduction of up to $300 for single filers or $600 for joint filers for cash contributions made to qualifying charities. This means even if you don’t have enough deductions to itemize in 2021, you can still get a tax benefit if you donate at least $300 or $600 this year.
Bunch Deductions - If you do itemize your deductions, or if your itemized deductions are close to the standard deduction ($12,950 for singles or $25,100 for joint filers), you might consider “bunching” your charitable contributions. This could mean delaying your 2021 contributions until January 2022 or pulling your 2022 contributions into 2021 so you can double up your contributions in one year. This might allow you to exceed the standard deduction and receive a greater tax benefit from your charitable contributions.
Donate Appreciated Investments - If you are giving a large amount to one organization, you might consider donating appreciated investments. If you have a stock or fund that has gone up significantly in value, and therefore has a large unrealized gain, you can donate that investment and claim a deduction for the current value. In addition to the tax benefit from the charitable contribution, this way you also avoid realizing a taxable gain when you sell that investment. This can also be a way for you to rebalance your portfolio if your stock allocation has gone well above your target without triggering big gains.
Consider a Qualified Charitable Distribution - If you are over 70.5 you can do something called a Qualified Charitable Distribution (QCD) of up to $100,000 (or your RMD if it is lower) from your retirement account. This amount can count towards your annual Required Minimum Distribution (RMD), thereby reducing your taxable income. The distribution needs to be made directly from your retirement account to the charity.
Take Advantage of the 100% AGI Limitation - The allowed deduction for charitable contributions is typically limited based on your adjusted gross income. Different types of charitable contributions have different limits and if you exceed the limit, any excess is carried forward for five years. However, for 2021 the cash contribution limit has been raised to 100% of your adjusted gross income, effectively allowing you to bring your income down to zero. While it might not make sense to pay $0 tax in any given year, it does allow you to take more of a deduction than you otherwise would be able to.
Use a Donor Advised Fund - If you would like to make a large donation in a given year for tax reasons but aren’t sure who to donate to or just want to spread the donations out in future years, consider using a Donor Advised Fund (DAF). These are easy to set up at a number of different institutions, including Schwab, Fidelity and Vanguard. You can donate highly appreciated investments as outlined in number 3 above, then do cash donations out of the DAF throughout the year or in future years. It should be noted that you are not able to do your QCD to a Donor Advised Fund nor does this deduction qualify for the 100% of AGI limitation. If you are considering a DAF you should act quickly as most custodians get overloaded with requests for these donations at year-end and they might not be able to process it if you wait too long.
If you are considering year-end charitable giving and have questions about any of the above strategies, feel free to reach out to us and we’d be happy to assist you. Integrating your charitable giving goals with other aspects of your financial and tax planning is an important aspect of the services we provide!
-Chris Benson, CPA, PFS
The views expressed represent the opinions of L.K. Benson & Company and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person.
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