We have experienced a year of disruption and uncertainty, and many are wondering if it will end with a bang or a whimper. Let’s hope for the latter, as 2020 has already been enough of a “bang.” One thing that is encouraging, as we’ve endured these challenges, is that the charitably inclined have stepped up. So, the legacy of 2020 will not be a year of malaise but instead one marked by generosity and philanthropic spirit.
In a survey earlier this year, nearly 40% of Americans indicated they’re likely to donate more to charity this year than 2019, with 60% suggesting this is due to the pandemic and 19% citing the political climate. As we take a look at Giving Tuesday’s record-breaking numbers, it appears donors have kept to their word. Donors gave an estimated $2.47 billion in 2020, a 25% increase from last year’s $1.97 billion. There was also a rise in the number of donors who participated in Giving Tuesday, with a total of 34.8 million people compared to 2019’s 25.56 million.
We observed a record number of 2020 donations, with donor-advised funds (DAF) playing an important role. Money is simultaneously flowing out of their accounts as donors continue contributing into those same funds, despite the stock market roller-coaster and the troubled economy. For instance, what we’ve seen within our organization, DonorsTrust, is a 30% increase in grant volume. And that number is climbing as we are now in the final weeks of December, and are processing a flurry of grant requests. This year DonorsTrust accountholders will have requested more money out of their DAF accounts than they contributed into them.
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While there has been an uptick in giving throughout 2020, the pending revolving door of Washington political institutions can affect future giving patterns. Nothing is certain, but here are four tips to maximize your charitable giving strategy as we move into the unknowns of 2021.
1. Take Advantage of Current Tax Laws
One notable tax advantage to utilize before year’s end is the CARES Act, which created two tax incentives to spur donations. The first is a $300 write-off that donors can claim for giving cash to charity, even if they take the standard deduction when filing taxes. The second incentive raised the limit on charitable deductions as a percentage of one’s adjusted gross income (AGI) from 60% to 100%. If you are in a position to do so, consider increasing your 2020 charitable gifts to wipe-out your federal income tax liability. Two rules apply: First, this only applies to cash gifts and it cannot be used (entirely) to fund a donor-advised fund account. Secondly, you can fund your DAF under the old rules (up to 60% of AGI) and also make qualified gifts to a public charity to reach that 100%.
2. Plan for Year-End Giving
Year-end giving remains popular, as many nonprofits report receiving the majority of their annual giving during this time, specifically in December. This is thought to be because people feel generous around the holiday season and therefore are more inclined to give. Perhaps we are all just a bunch of procrastinators — and there still are a few days left to act before the end of the year. However, next year, instead of waiting until the last minute and racing to give to multiple different charities, plan your giving strategy well ahead of time. One way to effectively plan for the future is to seek out help in the form of a charitable giving vehicle, such as a donor-advised fund.
3. Establish a DAF
From a tax perspective, DAFs are the most attractive charitable giving vehicle. The vehicle allows for an immediate tax deduction, even if distributions from the fund are made in the future. And if you already have a DAF, you can receive a current-year deduction for a gift made into your fund before Dec. 31 even if you wait until the new year to recommend any grants to charities. Most importantly, by utilizing a DAF now, donors can avoid the possible tax law changes set in place by political forces next year.
Additionally, if you’re looking to donate to multiple charities at year’s end or all year long, DAFs make it easy. They provide a simple way to organize donations, providing one statement that lists each organization supported, as opposed to separate statements from each charity.
4. Consider Future Tax Laws
At least until the mid-term elections in 2022, margins in Congress and the Senate will be thin – but, when combined with a friendlier White House, Democrats will have a slight advantage. This means if a tax bill were to be passed and rates increased, charitable deductions may be caught in the middle. For example, high-income donors can currently write off $37,000 of a $100,000 charitable gift, but the proposed plan by President-elect Biden would limit the write-off to just $28,000. Additionally, Biden’s plan to impose a 12.4% Social Security tax on income earned above $400,000 would likely hurt giving, and that tax can’t be reduced through giving. Further, he has already signaled that he would like to revisit (and reduce) the current estate tax caps, currently scheduled to sunset at the end of 2025.
As we enter the final days of the year, those charitably inclined still have a little time to act. And if you can’t get it all done before the clock runs out, take a moment to plan your giving strategy for next year instead. The rules around giving are sure to change, so it’s imperative you take advantage of the charitable tax while you still can. Follow these giving strategies and prepare yourself for the tax changes soon to come and well into the future.
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