The CARES Act passed in March gave new tax incentives to encourage charitable giving in 2020. There are a few tax strategies you can take advantage of this year to help maximize your giving while minimizing your taxes.
New Deduction Limits for Cash Gifts
The CARES Act created new deduction limits for 2020 cash gifts. Previous tax laws only allowed cash gifts to be deducted up to 60% of your adjusted gross income (AGI). The new limit allows you to deduct up to 100% of your AGI. If you wish to give more than 100% of your AGI, you can carry forward the excess gift as a deductible contribution on tax returns for the next five years. What’s the catch? To use the new limit, the cash must be gifted directly to a public charity. Cash gifts cannot be transferred to a Donor Advised Fund or Family Foundation(s).[i]
Cash Gifts using IRA Distributions
If you are over 59 ½ with an IRA, you can take a distribution from your IRA and give the cash to charity. This gift would fall under the new cash deduction limit and allow you to deduct up to 100% of AGI. If the size of the gift is more than 100% of your AGI, the five-year carry forward rule still applies. This strategy benefits those who would like to gift assets from an IRA. It would also benefit those who want to give more than $100k from an IRA who may be limited by other strategies (such as the QCD). Others that would benefit from this strategy are those with a sizeable estate who plan on leaving part of their estate to charity. It could be a great year to gift now and take advantage of the new limits while also reducing your taxable estate. This strategy would allow you to see the benefit of your gift during your lifetime while saving taxes.[ii]
Qualified Charitable Distribution (QCD)
A QCD is a direct transfer of funds from your IRA to a qualified charity and is limited to $100k per person. The QCD can be a gifting strategy for those who are over 70 ½ and want to make a gift of up to $100k from an IRA. A QCD can be counted towards your annual Required Minimum Distributions (RMDs), which begin at age 72.[iii] Remember, RMDs are 100% taxable and subject to ordinary income tax rates. A QCD can help satisfy partial or your entire RMD for the year and reduce your taxable income in retirement.
Changes to RMDs & QCDs for 2020
The CARES Act waived RMDs for 2020. Although there is no RMD requirement this year, you can still participate in a QCD. This would benefit retirees who are at least 70 ½ and wish to give up to $100k from an IRA.[iv] Using a QCD would help reduce the size of your estate and decrease future RMD amounts. If estate taxes or the size of your future RMDs are not your concern, you might want to wait until next year to benefit from this strategy.
Gifting Appreciated Assets
Gifting appreciated assets can be one of the most powerful gifting strategies. Assets with a low cost basis that have appreciated over time are subject to capital gains rates when they are sold. Instead of selling securities and gifting the cash to a charity, you can gift appreciated securities.[v] You will receive a deduction for the current fair market value without incurring any capital gains tax.
Want to give but unsure where you want to make an impact? Another strategy is to create a Donor Advised Fund (DAF). A DAF is a charitable account that allows you to gift appreciated assets and receive a tax deduction the year the gift is made. It is important to know that you will no longer own the assets once they go to the DAF, but you will still have control over where they eventually go. In addition, the assets in the DAF can be invested, so there will continue to be an opportunity for growth over time. You can learn more about Donor Advised Funds here.
Front-Loading your Gifts
If you find that your gifts are less than the standard deduction amount ($12,400 for single, $24,800 married filing jointly), it might be beneficial for you to take advantage of the new cash gift deduction limits and combine multiple years of gifts into 2020. You could gift more than the standard deduction amount and receive an itemized deduction for 2020 and take the standard deduction in 2021.[vi] This would allow you to maximize your deductions and could produce higher tax savings than spreading out your charitable gifts into two different tax years.
Below are a few important deadlines for our clients with accounts at Charles Schwab that are approaching.
- Gifting Mutual Funds to a Charity – December 7th
- Gifting Stock to a Charity – December 14th
- Grant Recommendations from a Schwab Donor Advised Fund account – must be submitted by December 1st, for a charity to receive a grant by year-end.
There are various charitable gifting strategies that can be used to make the most out of 2020. Deadlines for processing these gifts are approaching. If you have any questions or wish to discuss your charitable gifting strategy, please reach out to your Team Hewins advisor. We will coordinate with your tax and estate advisor(s) to ensure your gifts are tailored to your individualized financial plan.
[i] Laughton, Kim. “Why 2020 Is An Especially Good Year To Give”. Schwab Brokerage, 2020, https://www.schwabcharitable.org/content/why-2020-is-especially-good-year-to-give Accessed 18 Nov 2020.
[ii] Dall, Nicholas. “How The CARES Act Encourages Charitable Giving In 2020 – Anders CPA”. Anders CPA, 2020, https://anderscpa.com/how-the-cares-act-encourages-charitable-giving-in-2020/?tag=covid-19,fwep,notforprofit. Accessed 18 Nov 2020.
[iii] “Qualified Charitable Distributions – Fidelity”. Fidelity.Com, 2020, https://www.fidelity.com/learning-center/personal-finance/retirement/qcds-the-basics. Accessed 18 Nov 2020.
[iv] “Qualified Charitable Distributions – Fidelity”. Fidelity.Com, 2020, https://www.fidelity.com/learning-center/personal-finance/retirement/qcds-the-basics. Accessed 18 Nov 2020.
[v] Dall, Nicholas. “How The CARES Act Encourages Charitable Giving In 2020 – Anders CPA”. Anders CPA, 2020, https://anderscpa.com/how-the-cares-act-encourages-charitable-giving-in-2020/?tag=covid-19,fwep,notforprofit. Accessed 18 Nov 2020.
[vi] Dall, Nicholas. “How The CARES Act Encourages Charitable Giving In 2020 – Anders CPA”. Anders CPA, 2020, https://anderscpa.com/how-the-cares-act-encourages-charitable-giving-in-2020/?tag=covid-19,fwep,notforprofit. Accessed 18 Nov 2020.
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