As the end of 2021 approaches, charitable giving may be at the forefront of your year-end planning. Considering recent tax changes, it is important to review various strategies to gift in a tax-efficient manner.
Over the past couple of years, a few changes have been made to the tax law that may impact how you can give most efficiently. These include:
- Increased Standard Deduction Thresholds
- New “Above the Line” Charitable Deductions
- Increased Cash Contribution Limits
1. Each year, taxpayers have the option to either take the standard deduction or itemize expenses. Below, we’ve outlined the 2021 standard deduction rates.
|Filing Status:||2021 STANDARD DEDUCTION|
|HEAD OF HOUSEHOLD||$18,800|
|OVER 65 OR BLIND (MARRIED)SINGLE||$1,300|
|OVER 65 OR BLIND (SINGLE)||$1,700|
In terms of charitable giving, charitable contributions are deducted from income through an itemized expense report, and the standard deduction acts as a “hurdle” rate. Most taxpayers do not itemize, but those that do primarily deduct state and local taxes (SALT), mortgage interest, and charitable gifts. Please refer to the illustration below for further explanation.
Scenario #1 – If your aggregate itemized deductions fall below your corresponding standard deduction, then you should take the standard deduction. As a result, you’ll be subject to “lost” or “unused” deductions, meaning that your charitable gift does not receive a tax deduction.
Scenario #2 – To reduce lost deductions, consider the timing of your gifts. For example, if you typically give $10,000 annually, you could gift $50,000 this year to fund the next five years of your giving. This strategy is referred to as “charitable bunching.” As a result, you exceed the “hurdle rate” and deduct your itemized expenses in the year you chose to “bunch your gifts.”
Scenario #3 – As you incorporate more itemized deductions (such as qualified mortgage interest), your “bunching” offers a greater tax benefit.
2. If you take the standard deduction, there is a temporary provision encouraging and allowing taxpayers to make and deduct certain charitable donations. The Consolidated Appropriation Act of 2021 extended and modified a CARES Act provision where taxpayers may deduct cash charitable contributions “above the line” without having to itemize. In 2021, taxpayers filing ‘Single’ or ‘Married Filing Separately’ may deduct $300, and taxpayers filing ‘Married Filing Jointly’ may deduct $600 worth of contributions while claiming the standard deduction.
3. Charitable deductions are limited by your adjusted gross income (AGI). In prior years, deductions for charitable cash contributions were limited to 50% or 60% of AGI (depending on whether you gave capital gain property in addition to the cash). So, if your AGI is $100,000, you could deduct up to $50,000 or $60,000. However, the Consolidated Appropriation Act of 2021 extended the CARES Act provision, removing AGI limitation on cash contributions. Meaning, if your AGI is $100,000 in 2021, you can deduct $100,000 worth of cash contributions (100% of AGI). Note, this only applies to cash contributions directly to charities (not donor-advised funds). However, long-term appreciated assets (such as stock held for more than a year) are still eligible for deduction up to 30% of AGI to most charities and donor-advised funds. If you exceed these limits, you can carry forward the deduction for up to five years, which applies to all types of contributions.
Considering the changes listed above, should you gift cash or appreciated securities? When should you gift? And out of which account should you gift? When navigating the charitable giving space, it is important to consult your CPA and financial advisor. Below are a few suggestions that may help as you consider how these new changes will affect your giving strategies.
Donor-Advised Funds (DAFs): In this strategy, you gift cash or appreciated assets to a donor-advised fund and receive a charitable deduction for that year. This deduction also applies to any “charitable bunching” strategies. You do not need to specify which charities you’d like to support at the time of the gift. When you are ready to distribute funds from the DAF, you submit a grant recommendation naming the charity or charities of your choice. A DAF can be an excellent tool to gift appreciated, long-term (a holding period of longer than one year) assets. SignatureFD partners with a number of DAF platforms, including Schwab Charitable, Fidelity Charitable, Cobb Community Foundation, Community Foundation for Greater Atlanta, Foundation for the Carolinas, and National Christian Foundation, among others.
Qualified Charitable Distributions (QCDs): This strategy is effective if you are age 70 ½ or older. To complete a QCD, you allocate an amount up to $100,000 from your IRA and send it directly to a charity. The QCD will count towards your required minimum distribution, if applicable, but will not count toward your taxable income. With a lower adjusted gross income through avoiding taxable RMDs, you may qualify for lower income taxes, Medicare IRMAA, tax credits/deductions, among other benefits. *Note, a QCD generally may not go to a donor-advised fund.
Remember, it’s important to work with your CPA and financial advisor to ensure that you follow the IRS rules, as there are many nuances that they can help you navigate. For instance, you become ineligible for QCD treatment if the funds come directly to you or if they don’t end up with a qualified charity. Additionally, the reporting from your IRA custodian will typically not show that a QCD was completed. Therefore, your CPA must manually add this to your 1040 tax form. This is often missed without watchful advisors.
Of course, it is always important to start by asking why. The “why” for most charitable contributions is not to simply gain a tax deduction but to also give back to the communities and people you care about.
At SignatureFD, we believe giving is a key to finding your Net Worthwhile. To learn more about our approach to strategic generosity and to start your own personalized Generosity Blueprint journey, visit us here: https://signaturefd.com/signaturegenerosity/
You plan your budget, you plan your investments, what if you could also plan your impact?