Year-End Strategy #2: How Can Charitable Giving Help Reduce My Tax Bill?
Charitable Giving Options for Doing Good AND Helping Yourself
The pandemic has brought out many different qualities in Americans, among the most positive of which has been generosity—as reflected in the remarkable increase in charitable giving. American individuals and households dug deep in 2020, giving a record $324.1 billion to charity.1 The upward trend is projected to continue through 2022, with charitable giving by individuals and households expected to increase by 6% this year and another 3.9% next year. 2
This is especially impressive given that Congress reduced some charitable giving tax incentives with the 2017 Tax Cuts and Jobs Act, which increased the standard deduction to $12,550 for single taxpayers ($25,100 for married taxpayers filing jointly) and limited or eliminated many personal deductions, making the threshold to itemize deductions much higher. As a result, many smaller charitable gifts that might previously have been itemized can no longer be deducted.
However, it should be noted that the 2020 CARES Act added back some charitable giving incentives (which have been extended through 2021). Specifically, individuals taking the standard deduction can claim an additional $300 deduction by making a direct cash donation to charity (couples can claim $600). Taxpayers who are itemizing deductions can bypass the regular 30% of AGI deduction limit and elect to take deductions up to 100% of AGI (and carry forward any excess for up to five years).
All said, there remain options for charitable-minded clients who wish to give generously to their favorite non-profits while also realizing commensurate tax benefits. Depending on your situation, here are some ideas to consider:
• Deduction Bunching
• Set Up a Donor Advised Fund (DAF)
• Donate Appreciated Stock
• Make a Qualified Charitable Distribution (QCD)
• Other Philanthropic Strategies for High-Net-Worth Families
Deduction Bunching
One option to give charitably while still getting a tax benefit is a method called “deduction bunching” that involves making larger-than-average charitable contributions in a single year and taking the tax deduction for the higher consolidated amount. This can be a strategic alternative to spreading smaller donations over multiple years but having to forgo a deduction benefit because the amount in any single year is too low.
Set Up a Donor Advised Fund (DAF)
A related “bunching” strategy for boosting tax deductibility is to set up a Donor Advised Fund (DAF), which is technically a tax-qualified public charity that you create and fund up front to receive an immediate tax deduction. But you can then define your own donation schedule and spread your giving to qualified charities over multiple years. The funds have the potential to grow tax-free in the DAF until donated.
In a nutshell, a DAF is a more streamlined and cost-effective alternative to setting up your own private foundation (many private foundations are converting to DAFs for this reason). You can even name it as you wish (Example: The Estes Family Foundation). A DAF can be created with as little as $10,000 and funded with cash, marketable securities, or mutual fund shares. Subsequent contributions can be made in increments as small as $500.
Donate Appreciated Stock
Another strategy for charitable giving is to donate appreciated stock to a tax-exempt charitable organization. Here are some benefits of doing so:
If the security being donated has been held for at least one year, the full market value of the donation may be deductible without paying taxes on the gains.
Stock donations can help contribute to a total deduction that exceeds the new higher standard deduction, potentially enabling itemization and a greater overall reduction of taxes.
Stock donations can be used as a tax-efficient tool to rebalance after-tax accounts over-weighted in equities.
Donating appreciated stock is a great way to fund a DAF (see above).
Make a Qualified Charitable Distribution (QCD)
If you are 70½ or older and have a pre-tax IRA, you can donate up to an annual maximum of $100,000 from the IRA to a qualified charity (or charities). This is called a Qualified Charitable Distribution (QCD), and because it is made directly to the charity, the funds are not reportable as income to the IRS and thus are not taxable. The funds do not go on your Form 1040 and this income exclusion can positively impact other tax calculations related to Social Security and Medicare.
QCDs can be made after age 70½ and before Required Minimum Distributions (RMDs) at age 72. In addition, after age 72, clients who must start taking RMDs from their IRA but do not need the funds for income may choose to make a QCD so they aren’t taxed on the distribution. A QCD cannot be made to a private foundation, donor advised fund (DAF), charitable gift annuity, or charitable remainder trust (CRT).
Other Philanthropic Strategies for High-Net-Worth Families
For high-net-worth families that wish to earmark a substantial amount of assets for philanthropic purposes (typically in the millions), there are other strategies that may be employed such as establishing a private foundation or charitable trust. Raymond James has a Wealth Consulting team dedicated to helping clients design and implement legacy plans that are customized to their needs and goals. We can facilitate this planning process with you.
As 2021 comes to a close, you may be reviewing your charitable giving plan. We are happy to answer any questions you may have about the strategies available to you and can help implement a plan that is appropriate for your financial situation and aligned with your philanthropic goals.
1 Giving USA 2021: The Annual Report on Philanthropy for the Year 2020.
Copyright © 2021. All Rights Reserved.
Securities offered through Raymond James Financial Services, Inc., Member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. Estes Wealth Strategies is not a registered broker/dealer and is independent of Raymond James Financial Services.
Any opinions in this newsletter are those of Estes Wealth Strategies and John Estes and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. The information presented herein has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. It is not a statement of all available data necessary for making a recommendation, nor does it constitute a recommendation.
While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.
Donors are urged to consult their attorneys, accountants or tax advisors with respect to questions relating to the deductibility of various types of contributions to a Donor-Advised Fund for federal and state tax purposes.