Tax-Smart Charitable Giving Strategies

Americans are generous and, despite the pandemic, 2020 represented a new record for charitable giving. Statistics show that approximately 90% of high-net-worth households donate to nonprofit organizations. While tax breaks are one reason people give, we also find that our clients derive a lot of happiness from helping others and from passing a sense of family purpose to their children. 

With the recent increase in the standard deduction (e.g., $25,500 for married couples filing jointly in 2021) and deductions for state and local taxes (SALT) capped at $10,000, many households may not donate enough to realize any tax benefit from charitable giving. 

As you think about your charitable-giving strategies for 2021 and beyond, here are some key considerations:

Strategies for giving before you reach Required Minimum Distribution (RMD) age

For small amounts, you can receive credit for at least a portion of your donations, even if you don't itemize deductions on your tax return.

The Cares Act's charitable deduction made available in 2020 has been extended for 2021: Taxpayers who don't itemize can deduct up to $300, and married couples filing jointly can double the deduction to $600. These must be cash donations; property or investment securities donations don't qualify, nor do gifts to donor-advised funds (DAF).

For those who can afford more substantial gifts, "bunching" 2 or 3 years' worth of charitable contributions into one year might be an option. For example, if you wish to donate $10,000 annually, you could consider making a $30,000 donation in 2021 (enough to justify itemizing), then contribute nothing and revert to the standard deduction in 2022 and 2023. 2021 provides a unique opportunity for those interested in such a strategy thanks to the stimulus bill: Cash gifts are deductible, only through the end of this year, up to 100% of your adjusted gross income (AGI).

For households with taxable assets that would otherwise be subject to substantial capital gains tax, gifting such assets in-kind can confer two tax benefits: 

• First, you can deduct on your tax return the amount based on the fair market value on the date of your charitable contribution (up to 30% of your AGI).
• Second, your capital gains tax liability is effectively canceled since you did not sell the asset.

And for those with concentrated stock holdings such as in employer's stock, there's a 3rd benefit: increased portfolio diversification and reduced risk.

Remember that you can give shares directly to a charity of your choice or use a donor-advised fund. The latter allows you to receive the full charitable tax deduction in the year of your donation while letting you grant smaller amounts annually from the DAF to your favorite charities later. 

Strategies for giving after you reach RMD age

A Qualified Charitable Distribution, or QCD, from an IRA provides another option for retirees to give to charity regardless of whether they itemize or claim the standard deduction.

Under a QCD (available once you turn age 70.5), you instruct your IRA custodian to transfer funds, up to $100,000, directly to the charity of your choice. The donated amount avoids income tax altogether. For retirees, the QCD provides a few advantages over a cash donation: it fulfills all or a portion of their required minimum distribution obligations, and it reduces future RMDs (and income taxes) by diminishing their IRA balances.

Two other benefits of making a QCD include: 1) A smaller portion of your Social Security benefit may be taxable, and 2) Potentially avoiding Medicare premium surcharges tied to AGI. Note that QCDs cannot be made to a Donor-Advised Fund, only directly to a charity.

We recommend working with your financial and tax advisors to determine which strategy best fits your situation and charitable goals. Get a professional opinion if you're planning a substantial gift. Other potentially more complex strategies such as setting up a Charitable Remainder Trust or a Foundation might be more appropriate.