Charitable Contributions and How To Take Them Further In 2020
While it may feel uncomfortable to make significant contributions during so much economic turbulence, now is a time when many individuals and nonprofits could use help the most. From COVID-19 relief to supporting social and local community issues, there are so many important causes to get behind in 2020 if you have the means.
In this article, we highlight four key giving opportunities worth considering to help improve your tax benefits and impact of your dollars at this time of need in our country and abroad.
1. Donate to a Donor Advised Fund (DAF)
A DAF is a charitable account that may be invested in order to grow and gift assets to eligible 501(c)(3) nonprofit charities now and over time. A DAF may be established at any public charity offering these accounts to their donors – examples include Schwab Charitable, Fidelity Charitable, Vanguard Charitable as well as many well-established community foundations and nonprofits.
A donor may open and fund a DAF by gifting cash, bonds, stocks, real estate and other assets into the account. The donation into a DAF is considered an irrevocable gift to charity, therefore the donor receives an immediate tax deduction for the year in which they make the donation but the donor retains the ability to recommend how the donated funds in the DAF are granted to qualified charities of their choice over time.
There are many strategies to establish a donor-advised fund and it is important to consult with a financial advisor and tax advisor before deciding on the most appropriate strategy for the donor. One potential approach is to focus on donating highly appreciated investments into a DAF, over cash, as appreciated investments sold within a DAF insulate the donor from any taxable gain (as long as the investments have been owned for longer than a year) while also allowing the donor to receive a tax deduction.
There are more than $100 billion in assets in DAFs. Image above from NP Trust’s 2019 DAF Report.
The Landscape of Giving – some inspiring stats!
→ Approximately 90% of high net worth households give to charity.¹
→ Roughly 77 million Americans—30% of the adult population—volunteer their time, talents, and energy to making a difference.²
→ Individuals are more likely to give to charity if their parents gave to charity.³
→ Americans gave $449.64 billion in 2019; a 5.1% increase from the year prior. Sixty-nine percent of this sum came from individuals; the rest from foundations, bequests, and corporations.⁴
2. Qualified Charitable Distributions (QCDs)
A Qualified Charitable Distribution (QCD) allows taxpayers over age 70 ½ to distribute up to $100,000 per year directly from their IRA to eligible 501c(3) charities. Although the CARES Act (Coronavirus Aid Relief and Economic Security Act) waived 2020 required minimum distributions (RMD) for IRAs, the QCD is still available to taxpayers. QCDs from IRAs can satisfy RMDs and are excluded from gross income but, consequently, are ineligible for a charitable-tax deduction. A QCD often benefits both the charitable organization(s) and donor. The charitable organization receives the full value of the QCD as a tax-exempt entity and the donor does not pay tax on the distribution. Please note a QCD cannot be made into a Donor Advised Fund (DAF).
A required minimum distribution (RMD) is the amount of money that must be withdrawn at a certain age, typically age 72, from retirement accounts (e.g. IRA, 401(k), 403(b), etc.) to avoid tax penalties.
3. Increased Deduction Limits
The CARES Act (Coronavirus Aid Relief and Economic Security Act), which was signed into law March 27, offers new tax incentives for charitable giving. This act increases the charitable deduction limits relative to adjusted gross income (AGI). In past years, charitable deductions were capped at 60 percent of AGI. With the CARES Act, a taxpayer may take a charitable deduction up to 100 percent of their 2020 AGI. However, for full tax benefits at least 40% of the charitable donation must be made directly to a public charity. The donor could, for example, give 60 percent to a DAF or private foundation and 40 percent to a charity. Corporations can receive deductions for up to 25 percent of taxable 2020 income donated to qualified charities, up from 10 percent.⁵ These increased deduction limits for individuals and corporations apply to cash donations only.
The idea behind incentivizing cash donations directly to charity versus a DAF is to inspire people to contribute their money in a way that is instantly usable by nonprofits. In this same line of thinking there are also some campaigns that promote quicker disbursement of DAFs, such as #halfmyDAF, which encourages individuals to give away half of their donor advised funds to charity.
4. Universal Deduction
Another new CARES Act provision allows people who do not claim itemized deductions on their federal tax returns (90 percent of taxpayers⁶) to receive an above-the-line $300 deduction for charitable contributions. This is referred to as universal deduction and may extend beyond 2020.
For the small minority of taxpayers who do itemize their deductions, they can normally deduct up to 60 percent of their AGI each year (per the Tax Cuts and Jobs Act). For 2020, as outlined in the CARES Act, itemizers may now receive deductions for up to 100 percent of their AGI, potentially allowing these generous donors to eliminate all taxes this year entirely. This level of giving is most often seen among individuals who have wealth significantly beyond their income.
Wealth Architects continues to consider potential options for our clients’ charitable, financial, and tax planning. We also encourage you to explore other forms of charitable giving not covered here, such as large in-kind donations, charitable remainder trusts, charitable lead trusts, charitable gift annuities, and more options for making long-term gifts.
There are many reasons to focus on philanthropy this year. Now is the perfect time to reach out to your financial advisor, tax advisor, employer, to a community foundation, and to do independent research to find the most compelling charitable options for you.
Contact us to discuss your options. Please note that Wealth Architects does not provide tax advice. We recommend consulting your tax advisor regarding your personal situation.
This article was written in partnership with Wealth Architect Tyler Scott – CFA, CFP®
¹ The 2018 U.S. Trust Study of High Net Worth Philanthropy conducted in partnership with the Indiana University Lilly School of Philanthropy
² The Corporation for National and Community Service
³ Indiana University Lilly School of Philanthropy Women’s Philanthropy Institute | Women Give 18: Transmitting Generosity to Daughters and Sons
⁴ Giving USA 2020