Charitable giving has been negatively impacted in recent years, starting with the Tax Cuts and Jobs Act (TCJA) in 2017 that increased the standard deduction, which resulted in fewer taxpayers itemizing deductions. Then, following the 2020 COVID-19 pandemic, many charitable organizations faced the same unfortunate hardships as for-profit businesses. Congress responded to these challenges by making changes to incentivize charitable giving for 2020 and 2021.
Adjusted Gross Income (AGI) Limitations and New Above-the-line Deductions
Increased Adjusted Gross Income (AGI) limitations and the new above-the-line deduction are two key provisions included in last year’s CARES Act that could impact your charitable giving in 2021. For 2020 and 2021 only, individual charitable deduction limitations for cash donations to certain organizations have increased to 100% of AGI (up from the previous 60%). This will apply to the taxpayer’s elected donations to all charitable organizations except donor advised funds, supporting organizations, or private foundations. This restriction is intended to get cash in the hands of charities that will use the funds now, rather than to pool or defer giving. An above-the-line deduction of up to $300 was allowed for cash donations to public charities in 2020. In 2021 this above-the-line deduction is $300 per taxpayer resulting in a maximum of $600 for joint filers. Thanks to the CARES Act, the new above-the-line deduction, allows taxpayers who do not itemize to see the benefits of their donations on their tax returns.
Beneficial Charitable Tax Contribution Strategies
Charitable donations can still be beneficial from a tax standpoint. There are plenty of traditional charitable giving tax strategies that still exist along with the CARES Act incentives. The most efficient method for making a charitable contribution is to make the contribution using appreciated securities. 2021 could be a great year to make contributions using appreciated securities with the current, strong stock market. A taxpayer that makes a charitable contribution using appreciated securities will receive a tax deduction for the full fair value of the security and will not be required to pay income tax on the built-in appreciation if the security has been held longer than one year. The itemized deduction for contributions of appreciated securities is limited to 30% of AGI, while contributions of cash have higher limits.
The Tax Cuts and Jobs Act (TCJA) that began in the 2018 tax year, doubled the standard deduction for all taxpayers. For joint filers in 2021, the standard deduction is $25,100 and the state and location tax deduction limit is $10,000, meaning more taxpayers are no longer itemizing, but instead, claiming the standard deduction. With the increase in the standard deduction, one strategy to maximize tax benefits from charitable donations is to group or bunch two, three, or several years’ worth of contributions in one tax year. Doing this will ensure that your itemized deductions in that tax year will exceed the standard deduction amount and then you can take the standard deduction in the years that follow.
If taxpayers feel uncomfortable with the bunching strategy, they should consider setting up and contributing to a donor-advised fund (DAF). A DAF is a charitable investment account that allows donors to make sizable contributions to that DAF and receive a current year tax deduction for the contribution and allows the donor to make grants from that DAF to charitable organizations at a future time. DAFs are especially efficient when there is a year in which you have unexpectedly high earnings particularly when that income is considered ordinary and taxed in the highest tax brackets. In our current tax code, there is a stacking rule, which means that itemized deductions first shield ordinary income items, such as interest income and wages, and then offset qualified dividends and long-term capital gains. With proper planning, a taxpayer could potentially offset all ordinary income items and only pay tax on their qualified dividends and long-term capital gains at the current 20%, 15%, and 0% federal tax rates.
Qualified Charitable Distributions (QCDs) from an IRA
The increase in standard deduction has made Qualified Charitable Distributions (QCDs) from IRA accounts a more valuable tool for individuals to manage their charitable contributions. A QCD is a taxable distribution from an IRA owned by an individual that is over the age of 70½ that is instead directed to a qualified charity. This amount, up to $100,000 per tax year, is not taxable income to the individual taxpayer. Making a qualified distribution allows those who are now taking the standard deduction to still reap a direct tax savings by giving to charity; however, QCDs cannot be used to make contributions to DAFs.
It should be noted that tax rates for taxpayers with higher levels of income are still relatively high with the top bracket reaching 37%. Considering the time value of money, it may still make sense to go ahead and make the contributions in 2021, especially if the amount and type of taxable income for 2021 is expected to be higher than 2022.
Hopefully, the utilization of tax techniques and CARES Act incentives will keep charitable giving strong while also providing tax benefits to individuals who previously felt they were ineligible. Consider current and future income levels, tax rates, and other deductions when planning your charitable giving to get the most bang for your buck.
About the Author
Matt is a Principal with Brown Schultz Sheridan & Fritz (BSSF) and a key member of the Firm’s Tax Department. He received his Bachelor of Science degree in Accounting from Pennsylvania State University. Matt has over 15 years of public accounting experience. He leads the Craft Beverage Group at BSSF, specializes in Research & Development (R&D) Tax Credit consulting and serves a variety of industries including craft beverage, insurance, construction, real estate, manufacturing and financial services.
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