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If you give to charity, make sure you have a wise charitable contribution strategy

If you're able to contribute, follow a wise charitable contribution strategy

by Jason Van Steenwyk | Contributor
April 15, 2020


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:

  • Establishing a memorial fund in memory of a loved one who died of the coronavirus.
  • Donating directly to a local hospital or nursing facility heavily impacted by the COVID-19 crisis.
  • Donating to a food bank.
  • Donating to your church or synagogue's charitable arms.

Here are several ways you can make a difference, while minimizing the impact of taxes.

Give, even if you don't itemize

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.

Increase your charitable contributions

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.

Donate highly-appreciated assets

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:

  1. Donate the entire amount in cash.
  2. Donate $100,000 in a highly-appreciated stock, which you bought years ago for $20,000.

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:

  • The charity still gets the full $100,000 gift.
  • You keep $100,000 in cash.
  • It may help you diversify, and reduce your portfolio volatility.
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Delay your contribution

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.

Accelerate your charitable contributions

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.

Give assets that have dropped in value

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.

Donate directly from your IRA

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).

  • QCDs are capped at $100,000 per year.
  • They count as RMDs.

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.

Name a charity as a life insurance beneficiary

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%.

Alliance America can help

Alliance America is an insurance and financial services company. Our financial professionals can assist you in maximizing your retirement resources and achieving your future goals. We have access to an array of products and services, all focused on helping you enjoy the retirement lifestyle you want and deserve. You can request a no-cost, no-obligation consultation by calling (833) 219-6884 today.

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