Retail businesses and charities have one thing in common: December is their big, make-or-break month.
The charities you support count on your extra financial help during December to achieve their annual goals and fulfill their missions. In this article, we will share five tips for year-end charitable giving that will help you be a more savvy, tax-smart donor. These giving tips will help regardless of whether you wish to give to your church, synagogue or other house or worship, to a school or university, a hospital or other healthcare nonprofit, or to one of the thousands of charities, both large and small, that provide a critical safety net of social services in our nation.
These strategies apply to U.S. taxpayers.
A Challenging Year
When the COVID-19 pandemic first hit in the spring, charities feared the worst. With the economy knocked to its feet, churches and charities alike worried whether donors would continue to give at past levels. To make matters worse, so many people lost jobs due to the pandemic that the demand for food, shelter, and other basic needs skyrocketed. Food banks, for example, have seen a 60 percent increase in demand this year. Feeding America, an industry group, says the number of people in the U.S. facing food insecurity is expected to jump to 50 million, up from 35 million last year. Even charities providing counseling, crisis intervention, abuse shelters and the like saw demand for their services soar during 2020.
After a drop in donations during the second quarter of 2020, the good news is that Americans stepped up and donated generously. Giving to charities is up 2.2 percent year-over-year, for the 12 months ending Sept. 30, 2020, according to the Blackbaud Institute. Giving in the third quarter of 2020 was only down slightly, 0.3 percent, from the same quarter last year. While that’s good news, the bad side is that results are uneven. Some houses of worship, and some charities, are faring better than others. Plus, even for those charities fortunate enough to raise as much or slightly more than last year, it may not be enough to keep up with rising demand for services or increased operating costs due to COVID.
With the COVID virus still soaring and the economy remaining weak at least into the first half of 2021, one thing for certain is that charities need our help more than ever. If you are considering a December gift, here are five tips for year-end charitable giving that will help you give in a smart, tax-advantaged way.
First, a word of urgency. The remaining time to make these gifts is short, so if you plan to do so, take action today. To be sure you qualify and execute the gifts correctly, contact the charity’s development or advancement office, or talk with your tax professional.
Tip #1: Take Advantage of This Year’s $300 Deduction for Charitable Donations
Most Americans can no longer benefit from itemizing their deductions, due to the higher standard deductions in current tax law. That means for most of us, there is no tax deduction for charitable donations. That’s still a shocker for many people, who were accustomed in the past to claiming the charitable deduction.
There’s a small exception, however, in the Coronavirus Aid, Relief and Economic Security (CARES) Act passed by Congress earlier this year. It allows those who claim the standard deduction and don’t itemize the opportunity to make an above-the-line deduction of up to $300 for cash contributions to charity. It’s a small benefit, but one definitely worth taking.
Tip #2: Make Your Large Donation This Year
If you’ve considered making a large donation to one or more charities, this may be the year to do so. The CARES Act also includes a provision that allows taxpayers who itemize to get a tax write-off for charitable contributions up to 100 percent of their Adjusted Gross Income. This is up from the former level of 60 percent. For gifts larger than one’s AGI, the deduction may be carried forward up to five years.
For both of these benefits in the CARES Act, donations must be made directly to the charity and not to a donor advised fund or private foundation. These incentives only apply to the 2020 tax year, unless the new Congress chooses to extend them.
Tip #3: Donate to Church and Charity From Your IRA (If You Qualify)
For those age 70 1/2 or older, one of the best ways to give to charity is through your Individual Retirement Account (IRA). The IRS says taxpayers in this age range can make what it calls a “Qualified Charitable Distribution” (QCD) to one or more nonprofits up to a combined total of $100,000 per year. A husband and wife could give up to $200,000 if both were 70 1/2 or older and own traditional (not ROTH) IRA accounts. Many retirees use this provision to reduce or eliminate the tax burden from making Required Minimum Distributions, or RMDs. The IRS mandates that retirees 72 and older must withdraw a set amount each year from their traditional IRAs, and this amount is usually fully taxable. A QCD can meet your RMD requirement, without having to pay any tax on the withdrawal. Qualified Charitable Distributions are not limited to your RMD, and you can still make a QCD donation this tax year even though the RMD requirement has been lifted for this year as yet another relief provision in the CARES Act.
For a more detailed discussion of IRA Charitable Rollovers and the QCD,
click here to see this past story from This Retirement Life.
Tip #4: Bunch Your Donations in a Single Year
Remember we said earlier that most Americans can no longer get a tax break for donations to charity due to the higher standard deductions on the federal tax forms? There’s a work-around to that problem. It’s called bunching. Let’s look at an example. If you and your spouse are both 65 or older and file a joint return, the standard deduction for the 2020 tax year is $27,400. Let’s say you typically give $20,000 per year to charity and have no other deductions. Since your charitable donation of $20,000 is below your standard deduction, you get no tax break. But what if you choose to give every other year, “bunching” your two years worth of gifts into a $40,000 charitable donation every other year? Now your giving to charity exceeds the standard deduction and you qualify for a tax benefit. A tax break every other year is better than none.
Your tax advisor can run the numbers for you and help you decide if you can benefit from bunching, and if so, whether to take the benefit this year or next.
Tip #5: Give Appreciated Assets, Not Cash
No charity is going to complain if you write them a check, but sometimes there are better ways for you to give than by cash, checks or debit cards. Experts in the field often recommend gifting appreciated assets, such as shares of stock, ETFs, mutual funds or real estate. By doing so, you can satisfy your philanthropic interests and avoid paying hefty capital gains taxes on the asset’s growth.
Let’s look at an example. Assume you purchased shares of XYZ stock many years ago for $50,000. Today, those shares are valued at $200,000. If you sell the shares, you will have to pay capital gains tax on the profit of $150,000. Now let’s assume that instead of selling the shares you donate them to your favorite charity. The charity gets a gift of $200,000, you avoid the capital gains tax, and you get to claim a deduction on your taxes for the full market value of the stock on the day you made the donation. For this hypothetical donor, that’s a far better outcome than writing a check to the charity! (Note: You may only claim a charitable deduction on appreciated assets of up to 30 percent of Adjusted Gross Income).
For Year-End Gifts, Act Quickly But Wisely
The IRS rules for executing these strategies successfully can be complex, so be sure to speak with your tax advisor before taking action. If you plan to make a significant year-end charitable gift this year using one of these strategies, act quickly, since time is limited. Donations must be received by the charity by Dec. 31.
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