Millions have been severely financially impacted by the COVID-19 outbreak. Others, meanwhile, remain in a position to count their blessings, and even increase their charitable contributions. Their charitable endeavors may include:
Here are several ways you can make a difference, while minimizing the impact of taxes.
Normally, only those who itemize their expenses are allowed to deduct their charitable contributions against their income. But a provision in the CARES Act allows an above-the-line deduction for charitable contributions of up to $300 per individual, or $600 per married couple. The term "above-the-line" means those who don't itemize can still deduct the amounts they contribute. It's subtracted directly from their AGI (donations to donor-advised funds are not eligible for this treatment).
This deduction is available only for those do take the standard deduction ($12,400 for singles or $24,800 for married-filers filing jointly in 2020). It's not available to those who itemize. If you do itemize, the usual rules will apply — except you can deduct even more in charitable contributions this year.
Previously, the law set caps on how much in income individuals and corporations were allowed to deduct against their earnings in a given year: Corporations can donate up to 25% of their earnings to qualified charities — an increase from 10% previous to the CARES Act. For individuals, the CARES Act allows you to donate up to 100% of your 2020 AGI — up from the prior cap of 60%.
This means that just about anyone can take a greater charitable contribution deduction than they could prior to the CARES Act.
These rules apply to gifts to public charities. Not to private foundations or donor-advised funds.
Charitable donations do not have to be in cash. In fact, in many cases, it's much better to donate assets, rather than cash. If you have highly-appreciated assets — that is, assets that have gone up significantly in value since you purchased them — consider donating them instead of cash.
When you donate highly-appreciated assets instead of cash, you effectively make the eventual capital gains tax you would have had to pay when you sold them disappear.
Example: You'd like to make a $100,000 donation to your hometown hospital. You can do it in two ways:
When you sell that stock, you would have to pay a 20% capital gains tax on your profit. So you would have a $16,000 tax bill.
Donating the highly appreciated securities instead of cash has the following advantages:
Under the CARES Act, there are no required minimum distributions for IRAs and 401(k)s in 2020. But you will still have to take your RMD in 2021. Your RMD will increase your taxable income next year. It could also trigger additional taxes, such as the tax on Social Security income.
If you expect to have to take an RMD next year, consider skipping your charitable contribution this year, but doubling your charitable contributions next year, when you have RMD income to deduct against.
If your current tax bracket is higher than you expect it to be in the future, consider contributing more to charity this year. In the long run, you may be better off making a large charitable contribution now, while you're in a high tax bracket, rather than making many smaller contributions throughout your retirement.
By giving assets that have declined in value, such as marketable securities, you use up less of your lifetime gift tax exclusion — $11.58 million, as of 2020. Ideally, this frees up more of your lifetime gift tax exclusion for future gifting.
While the RMD requirement for tax-deferred retirement accounts is waived for 2020, you can still make a charitable donation directly from your IRA or other retirement account. These gifts are called qualified charitable distributions (QCDs).
If your primary motivation for making a QCD is to offset income tax, you can skip your RMD this year, and save your charitable contribution for next year, when you will have more taxable income. Otherwise, you can still make a QCD of up to $100,000, tax-free to you.
It also gets assets out of your estate, where they may eventually become subject to the estate tax.
Also, if you are older than age 59½, you can now deduct up to 100 percent of your adjusted gross income in charitable contributions. This effectively neutralizes the $100,000 cap on QCDs, since you can take the taxable distribution and donate the whole thing, regardless of the amount, since traditional IRA and 401(k) distributions are normally a part of your taxable income.
Life insurance remains the most tax-efficient way to pass assets on in the event of the death of the insured.
Creating an irrevocable life insurance trust (ILIT) gets the life insurance death benefit out of your estate (subject to a three-year look back period) and prevents it from being subject to the onerous estate tax, with its top federal rate of 40%.
An Alliance America financial advisor can assist you in maximizing your retirement resources and help achieve your retirement goals. Alliance America's planning process is focused on personalized retirement income planning. As fiduciaries, our advisors are required to act in your best interest, and we are dedicated to helping you achieve the retirement lifestyle you seek. You can request a no-obligation consultation by calling 888-864-2542 today.