While each of us has our own very personal motivations for and approach to giving, collectively Americans continue to be the world’s most charitable nation. In 2020 alone, annual charitable gifting in the United States totaled over $471 billion (with gifts by individuals comprising 69% of that total).
And even though income and estate tax advantages aren’t the main reasons driving most people’s philanthropy, they’re nevertheless valuable benefits that shouldn’t be overlooked. However, to qualify for an income tax deduction on a charitable gift of cash or property, you need to:
- Itemize deductions on your income tax return;
- Meet gift documentation/substantiation requirements; and
- Make the gift to a qualified charitable organization.
In this regard, the Tax Cuts and Jobs Act (TCJA) of 2017 served to both giveth and taketh away. The TCJA not only retained the existing tax deduction for charitable contributions, it bolstered it by allowing taxpayers to contribute even more under the deduction. Prior to the TCJA, you could only deduct up to 50% of your adjustable gross income (AGI) as charitable gifts. The Act effectively raised the AGI limit to 60%, allowing taxpayers to gift more while still benefiting from the deduction.
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At the same time, the TCJA dramatically overhauled the standard deduction — essentially doubling the deduction amount while eliminating and scaling back a number of allowances. For 2021, the standard deduction is $12,550 for single taxpayers and $25,100 for those who are married filing jointly. Not surprisingly, that has dissuaded many taxpayers who used to itemize deductions from continuing to do so. For the 2019 tax year, only about 1 in 10 (11.4%) taxpayers itemized their deductions compared to about 1 in 3 (31.9%) prior to the change, according to IRS data.
One small victory for those who choose not to itemize is that the CARES Act and subsequent legislation includes a special $300 charitable tax deduction for both the 2020 and 2021 tax years — and for 2021, married couples filing jointly can deduct up to $600.
But what if you want to give considerably more than that to charity? Are there ways to still gain the tax benefits without having to itemize your deductions every year? Yes, there are. In fact, the following are two relatively simple strategies you may want to consider.
‘Bunching’ contributions to a donor advised fund
Let’s suppose you’ve historically donated $10,000 each year to one or more local qualified charities. But now, you no longer itemize your deductions. Rather than losing out on the tax benefits of your charity, you may want to consider bunching several years of giving (e.g., $50,000 for the next five years) into a single year and placing the gift into a donor advised fund (DAF).
DAFs are separate charitable investment accounts offered through qualified custodians. They’re extremely easy to set up, and can be funded with a variety of assets, including cash, stocks, bonds and funds.
Once you open and fund your DAF account, you choose a strategy for how any gifted (but not yet granted) funds will be invested. You can then start recommending grants of funds to any qualified charity you wish to support. And because contributions are irrevocable gifts, you get an immediate tax deduction in the year the gift is made (typically up to 60% of your AGI for cash contributions and up to 30% of your AGI for appreciated assets) no matter how long you take to distribute the funds.
Essentially, this strategy is a way to front-load multiple years of charitable deductions into a single tax year in which you opt to itemize deductions on your federal return. For example, in Year 1, you contribute $50,000 to your DAF (only distributing $10,000 of the money to charity) and itemize your deductions to get the full tax benefit. In Years 2-5, you can then take the standard deduction and still make the same $10,000 annual gifts in the form of “grants” out of your DAF.
Gifting RMDs you don’t need for income
Did you know that the IRS allows you to make tax-free distributions directly from your taxable IRAs to any 501(c)(3) registered charity rather than taking your required minimum distributions (RMDs)? It’s an opportunity to use RMDs you may not need for income, and instead fund a sizable gift (up to $100,000 per taxpayer per year) to one or more qualified charities.
This Qualified Charitable Distribution (QCD) provision is only available to taxpayers who are age 70½ or older, and provides a way to accomplish three goals in one: Satisfy your annual taxable RMD; support one or more charities that are important to you; and avoid having to pay income taxes on your RMDs, as well as the potential that your RMDs might push you into a higher tax bracket and/or prevent phaseouts of other tax deductions.
Example: Consider a married couple who are both age 75 whose combined RMDs for 2021 will total $60,000. When combined with their other annual income sources (Social Security, pension and investment income), the couple realize they will likely end up in a higher income tax bracket for the year, as well as be subject to a higher short-term capital gains tax rate.
By only taking $20,000 in RMDs and gifting the other $40,000 to their favorite charity using a QCD, the couple are able to reduce their modified adjusted gross income (MAGI) enough to drop down to a lower tax bracket, and avoid paying income taxes on the $40,000 they otherwise would have been required to take as part of their RMDs.
While charitable giving helps address critical humanitarian needs and provides an ideal way to light the flame of philanthropy in future generations, it can also arm you with some important tax benefits. We can help you explore these and other charitable giving strategies to help determine what best fits your needs and goals.
Janney Montgomery Scott LLC, its affiliates, and its employees are not in the business of providing tax, regulatory, accounting or legal advice. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any taxpayer for the purpose of avoiding tax penalties. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax adviser.
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