Tax-Efficient Tips for 2021’s Charitable Giving Season
With only a few weeks left in the year, giving season is upon us. To make the most of your gift, consider one of these tax-smart strategies.
![A pair of hands carefully hold a soft red crocheted heart.](https://cdn.mos.cms.futurecdn.net/nfMCwEsSsqvMNHmmUPDf2b-415-80.jpg)
Spurred in part by the pandemic, a record $471 billion was donated to U.S. charities in 2020, according to Giving USA. I expect that trend to continue this year, as individuals, couples and families are inspired, perhaps more so than years prior, to make an impact on their communities and the causes they care about.
For those planning to contribute to charitable organizations this year, consider these strategies to make the most tax-efficient donation.
A check may not be the smartest gift
A common mistake I often see novice donors make is their preference to cut a check to a charity, assuming it’s the simplest and most effective route. Given the stock market’s solid 10-year run, donors may want to instead consider gifting appreciated securities, or concentrated positions if they are seeking to trim portfolio holdings.
![https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-200-80.png](https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-320-80.png)
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
When an individual donates, for example, $5,000 in appreciated securities, versus $5,000 in cash, they reap a handful of benefits. Not only does this rebalance their portfolio, but it provides a tax deduction incentive – the donation can reduce taxable income, but only if the recipient organization qualifies (use this IRS tool to search all tax-exempt charities). Additionally, the donation allows the donor to avoid paying capital gains tax on the security. The charity also avoids taxes when they sell the donated investment.
For some novice philanthropists, it’s tempting to gift cash, however, gifting securities can be the far more strategic and tax-efficient approach for the donor, and encourage further giving to benefit charitable organizations.
Expanding a charitable footprint
According to the Giving USA report, donations to education, human services and environmental and animal organizations were estimated to have the highest increases in 2020. For my clients who are interested in expanding their giving – whether increasing the amount they give or opting to donate to multiple causes – I’ve recommended they use the Nonprofit Aid Visualizer (NAVI), powered by Vanguard Charitable. This tool pinpoints charities most impacted by the pandemic, giving individuals a clear picture of the giving landscape and organizations most in need.
For an experienced philanthropist who may be inspired to donate more this year than in previous years, they may consider “stacking” a donation. This allows the ability to deduct up to 30% of a donor’s adjusted gross income (AGI) by gifting appreciated securities, and then another 30% in cash (or another 20% in cash if donating to a donor advised fund), providing a tax deduction on both the securities and cash gifts. While the advantage of stacking allows a donor to utilize appreciated securities, it is worth noting that for the extremely philanthropic, the CARES Act and Coronavirus Stimulus Act increased the ability to deduct up to 100% of a donor’s AGI if contributing cash to an operating charity this year.
Aside from stacking, another strategy for a seasoned donor is gifting securities through a donor advised fund (DAF), a charitable giving account that allows a donor to invest, grow and give assets.
If a donor is planning to give to multiple charities this year, but doesn’t exactly know what causes to contribute to, a DAF is a good parking spot. The donor can take the immediate tax deduction once the DAF is funded, and decide which charities receive the funds at a future date. Additionally, a DAF enables a donor to piecemeal their donations out. For example, with $25,000 in the DAF, that amount can be gifted in full to one charity or separated to five charities receiving $5,000 each — and the donations can be made over the course of several years.
Age-specific considerations
Aside from philanthropic experience, there are also tax-efficient charitable giving strategies tied to a donor’s age. A qualified charitable distribution (QCD) is a great way to gift dollars to charity for donors who are at least 70½ (Question: Just want to make sure this shouldn’t be 72. Answer is YES.) at the time of the distribution. This strategy allows a donor to utilize dollars from their IRA to donate directly to a qualified organization. For those in a high tax bracket, this can be a tax-efficient way to spend down an IRA while avoiding ordinary income taxes – which would otherwise be due on distributions – since the dollars are being donated. Additionally, annual required minimum distributions (RMDs) can be donated to a qualified charity (up to $100,000), which can minimize the RMD’s tax consequences.
2021 could be another robust year for charitable giving, as donors remain inspired to help their local communities and causes in need of resources due to the continued pandemic impact. With only a few weeks left in the year, donors of all wealth levels and philanthropic experience should think through the different gifting tactics available to them to maximize the tax-efficiency of their donations for both themselves and their recipient organizations.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
Julie Virta, CFP®, CFA, CTFA is a senior financial adviser with Vanguard Personal Advisor Services. She specializes in creating customized investment and financial planning solutions for her clients and is particularly well-versed on comprehensive wealth management and legacy planning for multi-generational families. A Boston College graduate, Virta has over 25 years of industry experience and is a member of the CFA Society of Philadelphia and Boston College Alumni Association.
-
Visa Is the Worst Dow Stock Wednesday. Here's Why
Visa stock is down sharply Wednesday after the credit card company came up short of revenue expectations for its fiscal Q3.
By Joey Solitro Published
-
Another Analyst Moves to the Sidelines on Tesla Stock After Earnings
Tesla stock is spiraling Wednesday after the EV maker's big earnings miss and Wall Street has been quick to weigh in. Here's what you need to know.
By Joey Solitro Published
-
Confused by Annuities? Making Sense of the Different Types
Many investors aren't sure if annuities are a good option for meeting financial goals. Let's look at the different categories, along with their pros and cons.
By Kris Maksimovich, AIF®, CRPC®, CPFA®, CRC® Published
-
Talkin' 'Bout My Generational Wealth: Baby Boomers
With retirement, each generation has different priorities and challenges. For Baby Boomers, it's a matter of ready or not, here it comes.
By Alvina Lo Published
-
How to Avoid a Big Hassle if Your Financed Car Gets Wrecked
How an insurance check is made out for repairs can cause a world of problems if the lienholder is left out.
By H. Dennis Beaver, Esq. Published
-
Estate Planning Strategies to Consider as Election Nears
Are big changes in tax laws coming soon? Not likely, but you might want to take advantage of higher estate and gift tax exemptions well before the end of 2025.
By David Handler, J.D. Published
-
How to Get Your Money's Worth From Your Financial Adviser
A good financial adviser will focus on how your financial planning and investment strategy align with your lifestyle and aspirations.
By Pam Krueger Published
-
Think of Prenups and Postnups as Financial Planning Tools
These contracts provide a clear framework for asset management and protection and are especially useful if you get married later in life.
By Andrew Hatherley, CDFA®, CRPC® Published
-
Congratulations on Your Raise: Three Things to Do With It
We're not saying you shouldn't spend it on a new car, but there are some considerations to guard against lifestyle creep and to help ensure a comfy retirement.
By Andrew Rosen, CFP®, CEP Published
-
Check Off These Four Financial Tasks to Finish 2024 Strong
The new year is a popular time to set financial goals, but now is the ideal time to check how you're doing. Four tweaks could make a big difference.
By Daniel Razvi, Esquire Published