Charitable Giving Strategies: Don’t Just Write a Check
Californians are struggling. Between COVID-19 and wildfires, we’ve seen our share of adversity this year. And like many people, your first inclination may be to take out your checkbook (or, nowadays, your smartphone and Venmo or PayPal apps) to donate. But there are charitable giving strategies that can help support your favorite charities while saving you in taxes.
The CARES Act and Your Tax Deductions
This year, your donations will get an additional tax break thanks to the CARES Act, the coronavirus pandemic relief bill.
Since the passage of the Tax Cuts and Jobs Act of 2017, some taxpayers have felt less incentive to give to charity because the higher standard deductions made itemizing less attractive.
But this year, those wishing to donate to their favorite charity can take a $300 tax deduction on top of their standard deduction. This tax benefit is for every American who chooses to take the standard deduction and give to nonprofits.
If you plan to itemize, you can deduct up to 100% of your adjusted gross income (AGI) on your tax return for your cash contributions.
Qualified Charitable Distributions
If you are 70 ½ or older, you have an added tax break for giving to charity via a qualified charitable distribution (QCD). A QCD allows you to donate up to $100,000 from a traditional IRA directly to a qualified charity. Some retirees use a QCD in lieu of taking a required minimum distribution (RMD). The RMD age was 70 ½ for a long time and remains that age for anyone that turned 70 ½ before Jan. 1, 2020; however, for everyone else, the new age is 72.
Although the CARES Act waived RMDs in 2020, philanthropically inclined people may still find a qualified charitable distribution beneficial. A QCD lowers your tax-deferred account balances (which next year’s RMD is based on) and reduces your AGI (which is used to calculate Social Security income tax as well as some Medicare surcharges).
A few points to keep in mind for qualified charitable distributions:
The distribution must be made through the IRA custodian. The funds should never pass through your hands but, instead, go straight from the custodian to the nonprofit.
You’ll need to complete your QCD by December 31 for it to count for 2020.
The money must go to a qualified charity. Contributions to donor-advised funds or private foundations are not allowed. Online nonprofit databases like Guidestar can help you choose a charity.
Real Estate Donations
If you have real estate you are thinking of giving, consider donating it directly to a tax-exempt organization rather than selling it and then donating the proceeds. Assuming you’ve held the property for at least a year, you avoid paying capital gains taxes and can apply the fair market value as a charitable deduction on your tax return.
You’ll need to find a charity accepting real estate donations—and ideally, one that will handle the title and recording requirements. There are plenty of organizations like Habitat for Humanity that want and accept real estate.
Donor-Advised Funds
If you are unsure about which charity to donate to right now, then a donor-advised fund (DAF) may be a good option for you. A DAF allows you to contribute money to your account, take the deduction for the year you give, and then make grants to charities on your schedule.
DAFs do not just accept cash contributions. Many of them also accept long-term appreciated assets such as stock. By donating to the DAF, you avoid paying capital gains taxes and still get a deduction on your tax return.
After the Tax Cuts and Jobs Act increased standard deductions, a “bunching” strategy gained in popularity. With bunching, you combine several years’ worth of contributions to your DAF into one year so that you can itemize on your tax return. You then make grants to your favorite causes in the years you don’t contribute to the fund—until you are ready to start the process all over again.
This strategy can be helpful both to you and charity. You can still earn the tax deduction while maintaining a regular timeline of charitable giving through your DAF!
Talk to a Financial Advisor
Not sure which charitable-giving strategy is right for you? You may want to talk to a financial advisor. Our Roseville, California fiduciary wealth management firm works with clients to determine the philanthropic strategies that are most helpful in light of their overall situation and goals. We recommend you seek out a fee-only, fiduciary financial advisor so you know that the advice you receive is objective and in your best interest.
Schedule a complimentary, 15-minute call with a fee-only, fiduciary financial advisor today to discuss your personal situation.
This material was prepared by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax or legal advice.
Parkshore Wealth Management is a family-owned, independent, fee-only Registered Investment Advisor serving the greater Sacramento area with an office in Roseville, CA. We partner with financially responsible individuals and families who are eager to take positive steps that will allow them to use their money to build the life they desire. The firm is led by Harold Anderson, CFP®, and Daniel Andersen, CFP®, both members of NAPFA, the country's leading professional association of fee-only financial advisors.