Charitable giving is a wonderful way to support a favorite cause or organization close to your heart. Though the year is coming to a close, there’s still time to maximize tax breaks for your gifts while benefiting your favorite charities. These are some of the new laws and strategies to help you do that.
The CARES Act
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) has incentives for charitable giving. The hope is to stimulate philanthropy throughout the country during a time when many nonprofit organizations are struggling to provide more services with fewer dollars. The CARES Act provision allows for a deduction of up to $300, even if you don’t itemize deductions. Keep in mind the gift must be a cash donation that goes directly to the charity. This is a nice way for people to give in a small way and still receive a tax benefit.
The Tax Cuts and Jobs Act increased the standard deduction, making a strategy called “bunching contributions” more popular. Here’s how it works: This year, you make a contribution that’s large enough to allow you to itemize your deductions when you file your tax return for 2020. Because your donation is large, you might not make a donation next year, or even the year after that. The idea is that the large donation, which represents your giving for two or more years, allows you to itemize your deductions. This could be a great strategy to achieve your philanthropic goals and help your tax situation. One way bunching is done is through a donor-advised fund (DAF). This vehicle is offered through a brokerage firm, bank or community foundation. With a DAF, you can make a contribution and decide later where your donation will go. A DAF also allows your money to grow tax-free, meaning you could give a larger contribution in the future.
If you own stock for more than a year and itemize come tax time, you may get a bigger tax benefit if you donate appreciated stock to charity versus writing a check. Even if you don’t itemize, gifting the stock directly to charity helps you avoid paying long-term capital gains taxes on your profits. You can also utilize a donor-advised fund to gift the stock, making the process simple and easy. On the other hand, if you’re planning to give depreciated stock to charity, it makes more sense to sell the stock first and claim the loss on your tax return, and then donate the proceeds to charity.
Qualified Charitable Distributions
A great planning tool if you’re age 70 1/2 or older is to give money from an IRA directly to charity. This is called a “qualified charitable distribution” (QCD). This is an option if you wish to lower the taxable balance of an IRA, or if you’re age 72 or older and you don’t need the money from your required minimum distributions (RMDs). Donating through a QCD is a good way to avoid paying taxes on the money you withdraw while helping a qualified charity. But the money must go directly from an IRA to a charity to ensure the distribution doesn’t count toward your taxable income for the year.
There are tax benefits to giving assets like retirement accounts and life insurance policies to a charity. Giving assets that would normally have an income tax liability can be beneficial when leaving an inheritance. If you donate tangible assets, like art and jewelry, you may also receive a tax deduction equal to the value of the asset donated. Be sure to research the charity, though, because only donations to qualified charitable organizations are deductible.
If you need help deciding which of these might work for you or developing a long-term strategy, talk to financial and tax professionals. They can help determine the best way for you to maximize a charitable gift while also minimizing potential tax implications.
Justin Halverson is a founding partner of Great Waters Financial and leads the Minnetonka, Minnesota office. He believes that by building a strong financial plan and having the discipline to adhere to it, a family can experience an enriching and secure retirement. Justin lives in Medina, Minnesota with his wife, Kim, and their six children — Kindle, Justin (LJ), Josiah, Jonathan, Jamen and Jeremiah.