2020 year End Charitable giving Planning - Start now to get the most bang for your buck!
Many people make all of their charitable gifts at year end when they have figured out just what they can afford to give this year. This is a crazy year like we have never seen before, with a Pandemic, up and down economy and an election year that has required a lot of financial support from Americans. Even with all of that, 79% of regular givers state that they are planning to increase their giving in response to the Covid-19 Pandemic and 55% of regular givers state that they will continue to give to the organizations that they have supported in the past. (Fidelity Chairi
This year there are opportunities to make charitable gifts more tax advantaged that have not previously been available, in part because of the Cares Act. For example, when donating cash…
A. If a taxpayer does not itemize deductions on their income tax return, they have available to them an above the line deduction of up to $300 for donations to public charitable organizations (not including supporting organizations or Donor Advised Funds).
B. If a taxpayer does itemize deductions and has done so in the past on their income tax return, this year they may take a 100% deduction against Adjusted Gross Income for charitable donations to public charities (existing AGI limits are still in place for donations to private foundations at 30% of AGI and Donor Advised Funds 60% of AGI)
C. Corporate Donors are allowed a 25% deduction against Adjusted Gross Income for charitable cash gifts in 2020. ( previously the allowance was 10% )
The good news on top of that is that if a donor exceeds these limits, they can carry forward the deductions indefinitely according to the carry forward ordering rules.
To make the most of available charitable deductions it is time to start some more extensive planning. Strategy One may be to ramp up your tax savings in one year by bunching donations. For example if a taxpayer in the 35% tax bracket normally would donate $10,000 to public charities each year, has $5000 Mortgage Interest Deduction and a $10,000 SALT limitation, and takes the $24,800 standard deduction, they are still over the standard duction by $200. This will result in tax savings of approximately $70/year or $210 for the years 2020, 2021, and 2022.
Now if the same taxpayer made a $30,000 gift to the same charity in 2020, they will have exceeded the Standard Deduction by $20,200. This will give them a tax savings of approximately $7000 in 2020 because of the special rules in place this year. The charity end up with the same amount of money as they would have over three years, and the taxpayer has increased their tax deduction by nearly 100x with increased bottom line savings of approximately $6790.
Strategy number two applies to those who may have moved up a tax bracket this year due to increased income that is a one-time event such as a large trust distribution, sale of a business or even a lottery win! This is a similar strategy to bunching, but is even more impactful because of the rise in tax bracket. If the taxpayer would normally make charitable donations at their regular tax bracket, and they are now in a higher tax bracket, the impact of the savings increase by the difference in the brackets.
A. if a taxpayer in the 24% tax bracket normally makes an annual gift of $10,000 and for one year is in the 37% tax bracket, over 10 years, the savings would be approximately $25,300 over that time period.
B. If the same taxpayer takes advantage of their good fortune and makes one donation of $100,000to the same public charity in 2020, the tax savings will be $37,000. A nearly 50% in bottom line savings.
The last strategy that I will mention is gift of long term appreciated assets to charity. Donating appreciated assets to a charity allows the taxpayer to avoid paying long term capital gains taxes of 20% on the appreciated asset and also the Medicare surtax of 3.8% for a 23.8% savings and a more impactful gift.
Donor A is going to cash out highly appreciated stock worth $50,000 (with a basis of $20,000) and donate the cash to a favorite public charity.
Donor B is going to donate $50,000 in highly appreciated stock to this taxpayer’s favorite public charity.
Donor A Donor B
$50,000 Value of stock today $50,000
$20,000 Price paid for stock $20,000
-$7,140 Capital Gains Tax and Medicare Surtax $0.00
$42,860 Total contribution to charity $50,000
$15,858 Income Tax Savings from Contribution $18,500
The difference in this case was the $7,140 that Donor B did not have to pay in Capital Gains Tax and Medicare Surtax. Remember charities are tax exempt when they cash in appreciated stock!
Please plan early and call me or your accountant to make sure you can take full advantage of the options and tax planning available to you this year and every year. December 31 will be here before you know it. The Stillman Law Group is here to help you pass on what you have built and attained to those who you love. If we help you maximize your tax savings in the process it’s a win-win!
© The Stillman Law Group 2020