Tax Effective Charitable Giving Strategies for Individuals – Part 1, Current Gifts
Charitable giving is often an important part of financial planning and estate planning as well as tax planning. Charitable giving should be considered year-round, not just as an end-of-year tax planning tool. This article will begin a discussion on charitable giving strategies which can achieve positive tax results.
The Tax Cuts and Jobs Act made significant changes affecting itemized deductions. The TCJA nearly doubled the standard deduction for taxpayers (from $6,350 in 2017 for a married couple to $24,000 in 2018, and $25,100 in 2021) while limiting or eliminating certain Schedule A itemized deductions, reducing the number of individual taxpayers who itemize their deductions.
For taxpayers who itemize their deductions, charitable donations, as well as state and local taxes and mortgage interest, are the primary deductions. Nearly nine in 10 taxpayers now take the standard deduction and could potentially qualify for this new tax deduction. In tax-year 2018, the most recent year for which complete figures are available, more than 134 million taxpayers claimed the standard deduction, just over 87% of all filers (per IRS.gov). With fewer individuals itemizing, many feared that the TCJA would dampen charitable giving. But these changes have not diminished charitable giving by Americans.
As noted by the Tax Foundation in its review of Giving USA’s annual report, American’s charitable contributions in 2019 reached nearly $450 billion, a record level of giving in dollar terms and the second highest level when adjusted for inflation (https://taxfoundation.org/tax-cuts-jobs-act-affect-charitable-giving/). Charitable giving even increased during the COVID-19 crisis. Paul Sullivan, “Philanthropy Rises in Pandemic as Donors Heed the Call for Help” New York Times, June 26, 2020.
Tax planning is not always the primary incentive for charitable giving. Instead, charitable giving is often done as part of one’s lifetime philanthropic endeavors for organizations and causes of interest. However, tax effective strategies that offer tax advantages to the donor can provide the potential for larger charitable gifts.
Always talk to your advisor(s) before incorporating any of these ideas into your financial, estate or tax plan.
Outright Gift of Cash. Under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), every filer is allowed a $300 “above-the-line” deduction for qualified cash charitable contributions. For 2021, this above-the-line deduction is increased to $600 for married couples filing jointly who do not itemize tax deductions. The deduction does not apply to cash contributions made to private foundations, supporting organizations, donor advised funds or to split interest trusts. Check the Tax Exempt Organization Search tool on IRS.gov to make sure the organization is eligible for tax-deductible donations.
Gifts of Stock. Capital gains from the sale of appreciated securities are taxed at a 20% rate. Certain taxpayers are subject to the additional 3.8% Net Investment Income Tax (NIIT) on capital gains. Instead of selling the stock and paying the capital gains tax and NIIT, making a gift of the appreciated security directly to the charity eliminates the capital gains tax and NIIT. Additionally, you get a charitable tax deduction for the fair market value of the security donated. This approach allows you to give up to 23.8% more to charity than had you sold the security and donated the after-tax proceeds. Keep in mind that the charitable income tax deduction for the fair market value of the donated security is subject to a 30% adjusted gross income limit.
Alternatively, if you have securities that have depreciated in value, instead of gifting, sell the securities to realize the capital loss. The cash from the sale can then be contributed to the charity allowing for a charitable itemized deduction.
Qualified Charitable Distribution. Taxpayers aged 72 (or 70½ if you turned 70½ in 2019) or older must begin taking required minimum distributions (RMDs) from individual retirement accounts (IRAs). RMDs are taxable income to the IRA account owner. Alternatively, you can transfer up to $100,000 annually directly from an IRA account to a qualified charity. Qualified charitable distributions are not taxable income to the IRA account owner and may be used to satisfy all or part of the amount of your RMD from your IRA. This is an ideal tax effective charitable giving strategy for people who do not itemize their deductions. A qualified charitable distribution does not apply to contributions made to private foundations, supporting organizations, donor advised funds or to split interest trusts. The CARES Act made this provision permanent.
Real Estate. As with a gift of stock, a gift of real property to a charity can result in tax savings. Gifting the property can avoid recognizing the gain from the sale of appreciated real property. A deed of gift to the charity allows for a charitable deduction for the fair market value of the property. When gifting real property, it is important to discuss the donation with the charity prior to gifting. The charity will want to evaluate the use of the property and the associated risks of ownership.
One must also be aware of the additional substantiation requirements imposed by the IRS when making a noncash charitable contribution deduction in excess of $5,000. First, you must receive a contemporaneous written acknowledgment of the gift from the charity. Second, you must obtain a “qualified appraisal,” as defined in the Treasury Regulations, prepared by a “qualified appraiser,” also as defined in the Treasury Regulations. Third, Form 8283 (Section B), must be completed and submitted with your filed tax return for which the deduction is claimed. Form 8283 must be thoroughly and accurately completed to claim a deduction. The Form 8283 must also be signed by the donor, the appraiser and the charity.
In Part 2 of Charitable Giving Strategies for Individuals, we’ll look at deferred charitable gifts, charitable bequests, charitable gifting with retirement accounts, charitable gift annuities and charitable trusts.
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