2020 has been a year unlike any in my lifetime. We are now in the fourth quarter of the year, and, if you are like me, you are ready to put this year behind you. That is not to say there is nothing left to do before we close the books on this year.
As is often the case around this time of year, many of us are more mindful of the things we are thankful for. We also start to think about gift-giving to our family and friends but also to the causes that are near and dear to our hearts.
While this year has been challenging in many ways, there are some unique opportunities for charitable giving in 2020.
No Required Minimum Distributions (RMD)
As we discussed in a previous blog post, the CARES Act that was passed by Congress in March 2020 brought about several changes to tax and charitable decisions for this year. One of the most significant changes that impact our clients is the suspension of required distributions for 2020.
While this provides a great opportunity for many to accelerate income through Roth conversions or harvesting gains, it doesn’t prevent you from donating to your favorite causes. If you are at least age 70 1/2, you are still allowed to give to 501 (c)(3) organizations directly from your retirement accounts and you do not have to pay taxes on these distributions.
However, if you are looking to make a charitable donation this late in 2020, you might consider delaying your charitable giving to 2021 when RMDs will most likely be back again. This allows your gift to count toward the 2021 requirement and gives you more flexibility around taxes in 2021.
We certainly understand this year has been tough on many businesses and individuals, including non-profits, so if you choose to give, please do not misunderstand you will still have the benefit of a tax-free distribution and the knowledge that you helped those in need. We realize that tax savings are a benefit, but not necessarily the reason we give to charities.
100% of Adjusted Gross Income
Another provision of the CARES Act temporarily increases charitable cash contribution limitations for taxpayers who itemize their deductions from 60 percent of adjusted gross income (AGI) to 100 percent of AGI. If more than 100 percent of a taxpayer’s AGI is contributed, excess contributions may be carried forward to future years, so you do not need to worry, you will still get a benefit in the future. Please note, this new deduction is only for cash gifts that go to public charities; it does not apply to contributions made to a donor-advised fund or non-operating private foundations.
For Those Who Take the Standard Deduction
The CARES Act allows all taxpayers to take a charitable deduction of up to $300, even if you do not itemize. In other words, if you donate up to $300 in cash to a qualified organization, your AGI will be reduced by up to $300 and you can still claim the standard deduction which is $12,400 for single filers and $24,800 for married filing jointly. Note that this $300 is per tax return so you get the same amount whether you are married or single. While it may seem that this is a small amount, a gift of this size could go a long way in supporting a cause you are passionate about.
If you’re planning to make a tax-deductible contribution to an organization in 2020, it’s important to determine whether the organization is a qualifying organization according to the IRS. Some organizations not considered qualifying organizations fall into categories like political organizations, lobby groups, social clubs, most foreign organizations, and individuals. A word of caution: while there are many worthy causes on crowdsourcing websites, not all organizations listed on those sites are qualifying organizations. The IRS has a handy tool, Tax Exempt Organization Search, to help taxpayers determine whether their contribution will be tax-deductible.
Life-Income Charitable Vehicles
The SECURE Act was passed in late 2019, not 2020, but it had one significant change to IRAs – the elimination of the “stretch IRA.” Previously, IRA account holders were able to give their retirement accounts to non-spousal beneficiaries and that beneficiary would be able to “stretch” the required IRA withdrawals over their lifetime. The SECURE Act forced beneficiaries to complete withdrawals in 10 years.
One way that some people with significant charitable intent have found to reduce the tax burden on their non-spouse beneficiaries is by designating a life-income charitable vehicle as the beneficiary of the IRA. An individual can name a charitable remainder trust or a charitable gift annuity as the beneficiary and potentially provide lifetime income for a younger family member and make a significant impact on a charity.
Donating Appreciated Securities/Donor Advised Funds
While many people have seen their incomes drop in this crazy world that is 2020, there are those who have benefited from this “new normal.” For those people, and perhaps those of you with significant gains from the 2008-2009 recession, you might want to consider donating investments that have increased in value directly to a charity. You don’t have to pay capital gains on the investment and you get a full charitable deduction for the value of the asset donated. If the charity of your choice doesn’t accept non-cash assets, you can use a donor-advised fund to receive the donation, turn it into cash and then send it on to the charity in cash. Please note that most custodians only donate to 501(c)3 organizations, not private foundations.
Need More Advice About Charitable Giving in 2020?
If you would like to learn more about charitable planning and how it fits into your overall financial plan, give us a call at 979-260-9771 or visit Briaud.com to schedule your free consultation today.