Year-end Charitable Gift Planning in 2021

In the last few years, so much has changed about charitable gift planning.  We offer a bit of recent history on the changes, and suggest some strategies that may help you reduce your tax bill while supporting the charities of your choice.

In 2018 the Tax Cuts and Jobs Act (TCJA) raised the standard income tax deduction significantly, from $6,500 for individuals and $13,000 for couples up to $12,000 for individuals and $24,000 for couples.  For many people, this means that the standard deduction now exceeds their itemized deductions.  As a result, the number of taxpayers who itemize their deductions decreased sharply from 31% pre-TCJA to less than 14% currently.  Taxpayers who don’t itemize are generally quite limited in their ability to deduct charitable donations. 

Universal Deduction – for those who don’t itemize

The CARES act passed in 2020 created a new “universal deduction” which allowed taxpayers who do not itemized to deduct up to $300 in cash donations to a qualified 501(c)(3) charity.  This is an above-the-line deduction which can reduce Adjusted Gross Income (AGI).  The Consolidated Appropriation Act of 2021 extended this deduction through 2021, and also allows for couples filing jointly to deduct up to $600.

Increase in available deductions – for those who itemize

Individual taxpayers who itemize deductions can deduct up to 100% of their AGI in 2021.  This limit has been increased, at least through 2021, from 60% to 100% of AGI for individuals, and from 10% to 25% of taxable income for corporations. 

Appreciated Stock – for those who itemize

If you own an individual stock position that you’d like to reduce or diversify, particularly one which has appreciated significantly, consider donating it.  You can deduct the fair market value, and the charity can sell the stock without incurring taxable gain.  Discuss with your financial advisor whether donating appreciated stock would be helpful to you in reducing a concentrated position, re-balancing your portfolio, or disposing of a stock with a low basis or unknown basis.  Appreciated stock can be donated directly to a charity, or to a Donor Advised Fund.

Donor Advised Funds (DAF’s) – generally for those who itemize

Donor Advised funds or DAF’s are managed by non-profit entities and allow a taxpayer to support charities consistently, while bunching income tax deductions into alternate years.  This can be helpful in reducing taxes. You set up a DAF account with a qualified non-profit custodian or community foundation, and you make donations of cash or appreciated securities to this account. Your gift is complete when your donation is made to the DAF, and you’re entitled to a tax deduction at that time. The gift to charity can be made later, when you request or “advise” the fund to donate to a charity of your choice. This allows you to donate consistently, while grouping your deductions into alternate years, which can be very helpful if you’re not able to itemize tax deductions every year. You can make substantial donations to the DAF in one year, itemizing deductions for that year.  You can then make fewer or no donations the following year, taking the standard deduction for that year.  At the same time, you’re able to provide consistent support to your chosen charities by making gifts from the DAF.

A DAF can also provide an efficient estate planning tool, as you can name the DAF as a beneficiary of your living trust. When you want to make additions or changes to your charitable beneficiaries, you can do it within the DAF easily, rather than paying your attorney to rewrite your trust. Each custodian sets minima on donations in and contributions out, and administrative costs are generally up to 0.6% depending on your balance.  

Qualified Charitable Distributions (QCD’s) – for those who itemize or take standard deduction

If you’re over 70 ½ and own an IRA, you can make donations from your IRA directly to charity. These donations satisfy your Required Minimum Distribution (RMD), and are excluded from income. This helps you save on taxes because you can fulfill your RMD with a QCD, leaving you with less taxable income from your IRA. You can donate using QCD’s whether or not you itemize deductions. For those who take the standard deduction, this allows you to reduce your income by much more than the $300 allowed by the universal deduction. Recent changes in the tax laws have moved the age for RMD from 70 ½ to 72, but the threshold age to make QCD’s remains at 70 ½. If you own an IRA and make any charitable contributions, ask your custodian or Financial Advisor about QCD’s.

Things to watch out for when making QCD’s:

• Donor must be 70½ or older, this does not mean “the year you turn 70 ½…” as with many IRA-related rules. You may not make a QCD until the day you turn 70 ½.
• QCD is limited to $100,000 per taxpayer per year.
• Donation must be from a traditional IRA. If you want to donate from an employer plan such as a 401(k), you’ll first need to roll it over into an IRA.
• Donor-advised funds are not eligible to receive QCDs.
• Beneficiary IRA’s may be used if the donor is over 70 ½.
• Record-keeping is important. Distributions will be reported as “Normal Distribution” on your form 1099-R. Save your acknowledgement letter to document your QCD’s.
• Plan ahead. If you’re taking RMD monthly, you need to set aside QCD amounts in January if you want to keep the monthly distributions even.

We hope you find this information helpful. Please consult your tax professional and financial advisor to see if any of these strategies might be a good fit for you.  This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your particular situation with a qualified tax professional.