Win-Win Charitable Giving Strategies Under New Tax Laws
The demand for charitable donations may be higher now than at any time in our recent history. With more people in need of financial help and fewer people in a position to provide it, it is critical that those of us who can give back are able to stretch our charitable dollars as far as possible. Recent legislation from the Tax Cuts and Jobs Act (TCJA), the SECURE Act, and the CARES Act have all impacted charitable giving strategies, so let’s examine what techniques work best in today’s environment.
Donating Household Items
Hauling our gently used items up to Goodwill has long been a way to secure a small charitable deduction. The deduction for non-cash gifts still exists, but far fewer taxpayers are claiming it since the TCJA was passed in late 2017. Why? The deduction for charitable giving is considered an itemized deduction and far fewer taxpayers are itemizing their deductions today. The TCJA greatly increased the standard deduction so if you don’t have high real estate taxes, mortgage interest, or medical expenses, the odds are you are taking the standard deduction and getting zero financial benefits from these donations.
Tip: Not sure if you itemize? Look for Schedule A on your tax return. If you find it, you itemized last year.
Cash donations are also considered an itemized deduction so just as you won’t get a tax break on your donated items unless you itemize, you won’t get a tax break for sending cash to your favorite charity either. At least that’s how it was until the CARES Act was passed this year. The CARES Act included a new charitable deduction of up to $300 which you can claim whether you itemize deductions or not. This “above-the-line” deduction not only reduces your federal tax but will reduce your state tax as well.
If you give more than $300, you aren’t completely out of options for getting a tax benefit from your cash giving. With planning, you can time the payment of taxes and charitable gifts so that more deductible expenses occur in the same year. This technique often referred to as bunching, seeks to bunch together deductions so you have enough write-offs to itemize in one year and take the standard deduction in the next. For example, if you donate 10% of your income to your church, you might increase that to 20% for one year and then take the next year off. The amount of the gift remains the same, but by altering the timing you can potentially secure a tax break.
Donating Stocks and Other Securities
While it’s less likely you will receive a current year income tax deduction on your charitable gifts, donating stock or other investments like mutual funds or ETFs can be a very effective way to avoid future income tax.
From a practical standpoint, donating shares of stock is relatively easy. After determining the number of shares you want to donate, the stock is simply moved out of your taxable (non-retirement) investment account to the charity’s investment account. If you have owned the stock for at least a year, you can deduct the fair market value of the stock, but again, only if you itemize.
The real value in donating stock comes from donating shares that have appreciated in value since you bought them. Imagine if you bought 100 shares of Apple stock back in 2013 when it traded for $100 per share. Today, each share is worth nearly $150 so your investment would have grown by $5,000. If you sell your $15,000 of Apple stock, the $5,000 gain would count as income on which you have to pay tax.
Instead, let’s assume you want to donate $15,000 to a charity and you send them your Apple stock rather than a check. As a charitable organization, they can sell the shares and avoid paying tax on the $5,000 gain. And the best part? You never have to pay tax on that gain either. You permanently avoid it. And if you want to replenish your investment in Apple, you can take the $15,000 of cash you would have donated and use that to buy new shares of Apple.
Qualified Charitable Distributions
Yet another way to benefit from charitable giving without itemizing deductions is the qualified charitable distribution (QCD). Anyone who has reached age 70 ½ can donate up to $100,000 per year to a charitable organization using money from an IRA. The funds must go directly from your IRA to the charity. If they do, the distributions are not counted as income, allowing you to avoid both federal and state taxes. Additionally, a QCD can satisfy your required minimum distribution (RMD), the annual distributions you must take from your IRA once you reach age 72.
The SECURE Act included a change in the law that did not pertain to QCDs but could potentially impact charitable gifts made from an IRA. The SECURE Act removed the age limit for making IRA contributions. As a result, people who are over 70 ½ might be eligible to make a deductible IRA contribution and make a qualified charitable distribution in the same year.
The amount of the deductible IRA contribution offsets the QCD, making that portion taxable. For example, if in 2021, you made a $7,000 deductible IRA contribution and donated $15,000 to charity directly from your IRA, only $8,000 of your QCD would be tax-free. The other $7,000 would be considered taxable income. There are potential workarounds to keep the QCD from being taxable income but the bottom line is that anyone who is considering an IRA contribution and a QCD in the same year should be cautious and seek advice from an expert.
Most of us don’t give to charity exclusively for the income tax benefits but sparing yourself some income tax may give you the ability to send more money to your favorite charitable organization. Before you toss your dollar bills in the offering plate, drop off your next bag of clothes at Goodwill, or take a distribution from your IRA, consider the tax-efficient giving strategies that are available. They can be a great way to help yourself and help others at the same time.