2021 Year-End Charitable Giving Guide

Extension of the Universal Deduction

The CARES Act provision, which allows taxpayers who do not claim itemized deductions on their federal tax returns to receive an above-the-line $300 deduction for charitable contributions made in cash, has been extended through 2021. Married couples who file joint tax returns can deduct up to $600. This is referred to as the universal deduction.

Charitable Contributions of Appreciated Securities (e.g., Stocks, Mutual Fund, Exchange Traded Fund)

A potentially useful strategy to offset income and/or minimize capital gains is to donate to charity a portion of appreciated securities before year-end. Gifting directly to a 501(c)(3) charitable organization, establishing a new donor-advised fund (DAF), and contributing to an existing donor-advised fund and/or charitable trust can provide an income-tax deduction.

Donate to a Donor-Advised Fund

A donor-advised fund (DAF) is a charitable account that may be invested in order to grow and grant 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 non-profits.

A donor may open and fund a DAF by gifting cash, bonds, stocks, real estate, and other assets into the account. Many DAFs now accept contributions of cryptocurrencies. 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. The donor retains the ability to recommend how the 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 an appropriate strategy. 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 (if the investments have been owned for longer than a year) while often allowing the donor to receive a tax deduction on the full value of the appreciated investment.

“Bunch” Charitable Contribution to Potentially Increase Tax Benefits

For many taxpayers, the total of their itemized deductions fall below the standard deduction, especially since the standard deduction increased under the Tax Cuts and Jobs Act (TCJA). Additionally, the TCJA capped the deduction of property taxes plus state income taxes to $10,000 per year. The 2021 standard deduction for single filers is $12,550 and for joint filers it is $25,100. Taxpayers who are in this financial position may benefit from “bunching” charitable contributions for multiple years into one tax year, thus enabling the taxpayer to increase their itemized deductions to an amount above the standard deduction. The taxpayer could take the itemized deduction in the year with the larger charitable contribution, and then return to taking the standard deduction in subsequent years. This strategy could result in a larger combined deduction over multiple tax years. Furthermore, a contribution to a donor-advised fund could, for example, allow a taxpayer to “bunch” their charitable contribution in one tax year yet spread out the grants to charities from the donor-advised fund in subsequent years. Please click here to read a Schwab Charitable case study on bunching charitable contributions.

Qualified Charitable Distributions

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. QCDs from IRAs can satisfy a required minimum distribution (RMD) 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.

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.

Increased Charitable Deduction Limit through 2021

In response to the ongoing COVID-19 pandemic, the Senate passed in December 2020 the Consolidated Appropriations Act of 2021, which extended the increased charitable contribution deduction limit through 2021. This allows taxpayers an additional year to make a qualifying tax-deductible cash contribution of up to 100% of Adjusted Gross Income (AGI). If a taxpayer’s total charitable contributions in 2021 exceed the 100%-of-AGI limit, the excess can be carried forward as a charitable contribution for up to 5 years. If you are considering a large charitable contribution this year, we encourage that you speak to a tax advisor.

Resources

Schwab Charitable:
https://www.schwabcharitable.org/
https://www.schwabcharitable.org/content/why-2021

Vanguard Charitable:
https://www.vanguardcharitable.org/

Fidelity Charitable:
https://www.fidelitycharitable.org/

IRS:
https://www.irs.gov/newsroom/expanded-tax-benefits-help-individuals-and-businesses-give-to-charity-in-2021
https://www.irs.gov/newsroom/year-end-giving-reminder-special-tax-deduction-helps-most-people-give-up-to-600-to-charity-even-if-they-dont-itemize

Wealth Architects does not provide tax or legal advice. For questions regarding tax or legal advice, please consult your tax or legal advisor.