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Year End Charitable Gifting Planning Under New Tax Rules
By Sean Condon, CFP®
Are you a philanthropic person who wants to help the community and save on taxes simultaneously? Donating cash or appreciated assets like stocks can be a great choice to accomplish these objectives.
Settling on the best gifting strategy can be somewhat complex however, especially since the rules have changed since the Trump administration’s Tax Cuts and Jobs Act of 2017 (TCJA of 2017). For 2020, following the CARES act, there are additional changes. Here is a brief overview of factors that might affect your year-end gifting strategy.
AGI Limits removed for 2020
It might be tempting to give excessive donations to eliminate your tax bill, however, the IRS has historically created AGI limits to combat this. Adjusted Gross Income (AGI) is the gross income you earned less any adjustments like Health Savings Account (HAS) and retirement plan contributions. For example, some donations, like cash donations to public charities, are limited to 60% of AGI. Non-cash donations of items like appreciated stock are limited to 30% and 20% of your AGI for public charities and private foundations, respectively.
The AGI limit has been completely removed for 2020. When you make a charitable contribution of cash to a qualifying public charity in 2020 under the CARES Act, you can deduct up to 100% of your adjusted gross income.
New $300 Deduction Even Without Itemizing
Tax Cuts and Jobs Act of 2017 doubled the standard deduction from $12,000 to $24,000. This means that less people need to itemize their deductions; if your itemized deductions are under $24,000, you simply take the standard deduction. The standard deduction prevents you from claiming charitable donations, however. If you make charitable contributions but don’t itemize deductions, you don’t get the tax benefit.
The CARES Act allows for an additional “above-the-line” deduction for charitable gifts made in cash of up to $300. Even if you are not itemizing on your 2020 taxes, you can claim this new deduction.
Charitable Gifting in High-Tax States
One major change from tax reform was that it capped the total state and property tax deduction at $10,000. This could be a major blow for some taxpayers, especially those that own property in expensive states like California or New York. Therefore, it could be prudent to increase charitable gifting to offset this limited deduction.
One simple strategy to do this is “lumping” several years’ worth of charitable contributions into one. This can be done effectively through a donor advised fund (DAF). A donor advised fund is like a philanthropic savings account. You put money into it for the purpose of giving to charity and let it accumulate until you are ready to make your donation. However, unlike a savings account, all contributions are irrevocable. Once you put an asset into a DAF, you cannot take it back.
Because you cannot take back your contributions, they are considered complete charitable gifts and immediately tax-deductible. You can take the tax deduction right away even if you wait several years to pass the money on to charity.
Qualified Charitable Distribution and Donating Appreciated Stock
Taxpayers get a gift from the IRS the year they turn 72: you now must take an annual (taxable) distribution from your IRA account. If you do not need the income, this required annual distribution can lead to required annual tax headaches. Fortunately, there are several strategies to help you reduce this.
Many retirees have historically used a loophole called the Qualified Charitable Distribution (QCD) from tax-deferred accounts like IRAs and 401(k)s. The QCD rule lets these retirees donate part or even their entire RMD to not pay taxes on that amount.
Another simple strategy is to donate appreciated stocks in a taxable account up to an equal amount of your RMD income. Gifting long-term appreciated stock, as opposed to cash, benefits both the charitable organization and the donor. The reason is that anyone who donates stock that has appreciated in value (and held it at least 12 months) is able to deduct the full value of the investment without being forced to recognize the capital gain in the process.
By donating appreciated stock, your capital gain disappears entirely, allowing you to permanently avoid any long-term capital gains tax liability that you would otherwise owe in the future.
Charitable Planning Around RMD Waiver
The annual RMD headache will be suspended in 2020 because taxpayers will not have to take any distributions. The CARES Act waives required minimum distributions (RMDs) from traditional IRAs, SEP IRAs, SIMPLE IRAs, and 401(k), 403(b), and governmental 457(b) plans for the year 2020. The waiver also applies to beneficiary account owners in addition to original account owners. Therefore, no one must take RMDs for 2020.
The suspension of the RMD for 2020 might have an impact on your charitable planning. With less taxable income for the year, it may even make sense to wait until January 2021 to make a charitable contribution. As always, speak with your tax advisor for ideas on how the RMD waiver might affect your charitable gifting or other tax planning.
The Bottom Line
Charitable gifting can be a great strategy to better the community and reduce your tax liability at the same time. Contrary to public belief, you can donate a variety of items like cars and real estate to charity which can really minimize significant tax bills. Yet, charitable gifting has changed, especially under the TCJA of 2017 and now the CARES Act of 2020.
Do you need assistance with charitable gifting strategies in 2020? Reach out to us for a free consultation by calling (844) 377-4963 or emailing firstname.lastname@example.org. You can also book an appointment online here.