Tax Considerations Involved with Charitable Donations

As we approach the end of the year, we give thanks for our blessings and consider again how to make a positive difference. Give to the Max Day is just behind us, and Giving Tuesday arrives on December 1st. After that, we continue into the holiday season, singing hymns for peace on earth and good will to all.

Research confirms that generosity is its own reward. In giving, we feel better about ourselves, we reinforce the values we hold dear, and we set an example for our friends and families to follow.

And, if you can do good and do well at the same time, why not? Indeed, understanding some of the rules surrounding charitable giving can help you be more strategic about giving. It may even lead you to give more. With this in mind, the Estate Planning group at Eckberg Lammers, P.C. offers the following short primer on the tax considerations involved with charitable donations.

Federal Income Tax Deductions for Charitable Contributions

Deductions for Non-Itemizers

This year, under the Coronavirus Aid, Relief and Economic Security (CARES) Act, individuals can take an “above-the-line” deduction for charitable gifts made in cash (including checks and credit card payments) of up to $300. The same limit applies for a married couple filing jointly. This applies regardless of whether you itemize deductions on your 2020 taxes. The contribution must be to a 501(c)(3) public charity. Donations to non-operating private foundations and donor-advised funds do not qualify for the new deduction.

Deductions for Itemizers

Beyond the first $300, you will need to itemize in order for charitable donations to reduce your income tax bill. That means your total itemized deductions – including charitable contributions – will need to clear the 2020 standard deduction of $12,400 for a single person or $24,800 for a married couple filing jointly. You may wish to consider your other sources of deductions such as mortgage interest, state and local taxes, and medical or dental expenses to evaluate your prospects for a tax break from the charitable deduction.

A common alternative, however, is “bunching” your charitable giving. This involves concentrating yearly donations into a single year to qualify for a deduction rather than making separate annual gifts where no single contribution would exceed the standard deduction by itself.

Contributions of Capital Gain Property

Suppose that instead of giving $1,000 in cash to charity, you gave the same amount in appreciated stock which you purchased five years ago for $100. This approach improves your tax situation in two ways: you avoid the inclusion of $900 in capital gains income on your taxes, and you get a deduction equal to the fair market value of the asset you contribute. Of course, many charities may lack the ability to convert that asset into cash. This is one of the ways in which using a donor-advised fund (discussed below) can simplify your giving: the financial institution can handle the liquidation for you and disburse the funds to your selected charities.

Deduction Limits Vary

Bear in mind that the extent of the deduction will depend on the type of charity and the type of donation. Some of the key rules can be summarized as follows:

  • This year, the CARES Act allows cash contributions to public charities (again, generally 501(c)(3) organizations) to offset up to 100% of a person’s Adjusted Gross Income (AGI).
  • Cash contributions to public charities and certain other organizations such as donor advised funds are eligible for deductions up to 60% of AGI.
  • Non-Cash Contributions (such as donated clothing) made to a public charity is subject to a deduction limit of 50% of AGI.
  • Contributions of capital gains property to public charities are limited to a deduction of 30% of AGI.
  • Cash contributions to private foundations are limited to a deduction of 30% of AGI.
  • Contributions of capital gains property to private foundations are limited to a deduction of 20% of AGI.

Transfer Distributions from Your IRA

If you are over the age of 70½, consider making a qualified charitable distribution (QCD) from your IRA. In lieu of taking a required minimum distribution (RMD) from the account, the funds (up to $100,000) are transferred directly from the IRA to the charity. As a result, the RMD does not qualify as income to you (and is therefore not taxed), the transfer also does not count against the AGI limits discussed above, and the charity receives a significant benefit.

Although the minimum age for receiving RMDs was increased this year to 72, this approach continues to apply to account holders over the age of 70½. It also remains an available strategy even though the CARES Act suspended RMDs for 2020.

If you’re under 70½ but over 59½, there is a related alternative for 2020 made possible by the CARES Act. Consider taking a cash distribution from your IRA, contribute the cash to charity, and then take a charitable deduction in an amount up to 100% of your AGI for the tax year.

For further information on the advisability of these strategies, we encourage you to contact your financial planner. If you do not have one, we are happy to make recommendations.

Donor-Advised Funds

Throughout this post, we’ve referred to donor-advised funds. This involves making a donation to a public charity or a community foundation (e.g., the St. Croix Valley Foundation), and the charity establishes an account named for the donor. The donor then makes recommendations for grants to be made to various charities from the account. This can simplify giving by centralizing your contributions in one place – and thus you receive one receipt for tax reporting – even if you plan to give to several charities. It also can help establish a legacy as the fund continues to grow. Your children can serve as advisors to the fund after you have passed away.

Don’t Forget to Leave a Legacy

End-of-year charitable donations are an important part of the season and we hope you find this guide useful. In separate posts, we will consider charity in the home, including gifting options for your children and grandchildren. We will also discuss legacy-level gifts through charitable trusts and testamentary planning that will support your philanthropic goals long after you’ve passed away.

Questions About This Topic?

Contact us today if you have questions about this topic or if we can assist you with your Estate Planning needs. Fill out the form below, or call our Stillwater, MN office at 651-439-2878 or Hudson, WI office at 715-386-3733.

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