Year-End Charitable Giving in 2020

The CARES Act passed last March creates some changes in the rules for charitable deductions in 2020, and some which may extend beyond the current tax year.  In addition, there are a number of tax-efficient gifting strategies you may wish to consider, which we’ll be discussing below.  Many charitable organizations are experiencing higher demand than usual in this difficult year.  It’s a great time to give if you can, and for many people it’s possible to reduce your tax bill when you donate to the charity of your choice.

CARES Act

The CARES act created a new “universal deduction,” which allows taxpayers who do not itemize to deduct up to $300 per tax return as an above-the-line deduction, which can reduce Adjusted Gross Income (AGI).  This deduction is expected to continue beyond the 2020 tax year.  It must be a cash donation to a qualified 501(c)(3) charity.  Some sources assert that this deduction is $300 for individuals so it must be $600 for couples; however the statute says “$300 per tax-filing unit,” which would apply to single filers as well as married filing jointly. 

If you do itemize, the CARES Act increases the available deduction for cash donations to qualified charities to 100% of income for individuals (up from 60%), and for corporations to 25% of income, (up from 10%).  For this deduction, the contributions must be made during the 2020 calendar year.

Employer Matching Funds

Many larger employers offer matching funds for donations to qualified charities. Rules vary, and charities may need to be pre-approved, so ask your Human Resources department or check your employer’s website for the procedures and forms you’ll need.

Appreciated Stock

If you have a stock position that you would like to reduce, but you want to avoid capital gains tax, consider donating the stock. A qualified Non-profit can sell the stock without incurring tax, and you can deduct the fair market value of the stock. You should discuss this option with your financial advisor, as it can be a great way to reduce a concentrated position, re-balance your portfolio or dispose of stock with low basis or unknown basis.

Donor Advised Funds (DAF’s)

Donor Advised funds or DAF’s are managed by a non-profit entity and allow a taxpayer to support charities consistently, while bunching income tax deductions into alternate years, which can be helpful in reducing taxes. You set up an account with a qualified non-profit custodian or community foundation, and you make donations 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 bunching your deductions into alternate years, which can be very helpful if you’re not able to itemize tax deductions every year. It’s also a very efficient estate planning tool, as you can name the DAF as a beneficiary in your 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.

If you already have a DAF, consider making donations now, when the need is great.

Qualified Charitable Distributions (QCD’s)

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. In most years, this helps you save on taxes because you can fulfill your RMD with a QCD, leaving you with less taxable income from your IRA. In 2020 you actually are not required to take RMD, a one-year reprieve created by the CARES Act. Using QCD’s is still a good strategy for donating from your IRA while excluding those funds from your income, and is available whether or not you itemize deductions. 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. If you’re able to save on taxes so that you’re “doing well by doing good,” that’s a great thing for you as well as the charities you support.  Note:  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.