Making a year-end gift to your favorite charity can not only give you that warm, fuzzy feeling, it can also be a useful tax planning tool. However, how and when you give can make all the difference. The tips below, including some new provisions from the CARES Act, can help you plan for the best result with your year-end giving.
- Take advantage of the new $300 charitable deduction added to the 2020 CARES Act. The deduction is allowed even if you don’t itemize your deductions-take the $300 above-the-line deduction for a gift to a charity AND get the full standard deduction of $12,400 for single filers or $24,800 for married filing joint filers. This is for cash gifts to charities, but does not include donor-advised funds. The $300 is the max per return-it is NOT doubled to $600 for married filing joint couples.
- Prior to the CARES Act, you could only deduct up to 60% of your current adjusted gross income. For 2020, you can deduct gifts up to 100% of your adjusted gross income. Once again, this only works for charities, not donor-advised funds.
- Bunch your deductions for several years into one larger gift to a donor-advised fund. Instead of giving $5,000 each year that might not give you any tax benefit (due to not being able to surpass the standard deduction), consider combining 2 or 3 years of $5,000 gifts and make a large 2020 contribution to a donor-advised fund. You get a deduction in the year of the gift and then you direct how and when the fund doles out your gift while you claim the standard deduction for a few years.
- Consider a Qualified Charitable Distribution (QCD) which is a tax-free transfer directly to a charity from your IRA. Individuals over age 70 ½ can transfer up to $100,000 per year. Doing so does NOT produce a charitable deduction-better yet, the amount transferred is NOT included in your income which will reduce your adjusted gross income and lower how other items of income are determined. This type of direct transfer also counts towards your required minimum distributions (RMD), even though RMD’s have been waived for 2020.
- Those age 55-70 ½ can also gift money from their IRA’s. While these IRA withdrawals are penalty-free, they are taxable. However, if you’re already going to itemize your deductions, this type of gift might make sense for you.
- Gift appreciated stock for a double tax benefit. You get a charitable deduction for the value of the stock on the date you give it to a charity (assuming you’ve held the stock for over a year) AND you avoid the capital gains tax you would have had to pay if you sold the stock and then donated the cash.
- Want to make a gift of appreciated stock, but also want to keep that security in your portfolio? Gift the appreciated stock and immediately purchase new shares. Your portfolio remains the same, but you have removed the capital gains tax burden and received a tax deduction.