CHARITABLE GIFTS should principally be motivated by generosity. Still, don’t overlook the tax advantages, including two special provisions for 2020.
If you give cash, you can deduct the entire contribution. For instance, if you’re in the 24% federal income tax bracket, a $1 contribution will save you 24 cents in taxes. Usually, you only get this tax benefit if you itemize your deductions, rather than taking the standard deduction. If you typically take the standard deduction—which will become more common, thanks to the higher standard deduction introduced by 2017’s tax law—you might bunch two or three years of charitable contributions into one tax year and see if that allows you to itemize. In any one year, the deduction for cash donations is typically capped at 60% of your adjusted gross income. Any excess can be rolled over and used during the subsequent five years.
But in 2020 and 2021, this 60% limit is waived—which means those who itemize could potentially deduct charitable gifts equal to 100% of their income. Also in 2020, those who take the standard deduction can claim a $300 deduction for charitable gifts. If you itemize your deductions, you can’t claim the $300 deduction. At year-end 2020, Congress extended the provision to 2021, with the deduction set at $300 for single individuals and $600 for couples.
Looking to save even more in taxes? If you itemize, often the smartest strategy is to give appreciated assets that you have held for more than a year and which would otherwise be taxed at the long-term capital gains rate. Donating appreciated assets can have three tax benefits.
First, you can deduct the value of your contribution. That deduction, in any given year, is capped at 30% of your adjusted gross income, a threshold most folks would never come close to breaching. Second, you avoid paying capital gains taxes on the assets involved. To avoid the tax, don’t sell the assets yourself, but instead let the charity do so. Third, you reduce the size of your taxable estate, which could ultimately mean paying less in federal and state estate taxes.
Want the tax savings today, but not sure which charities to support? You might contribute to a donor advised fund, such as those operated by Growfund, FidelityCharitable.org, T. Rowe Price Group’s ProgramForGiving.org, SchwabCharitable.org and VanguardCharitable.org. Your money can collect investment gains while you decide which charities to help. What if you have a loss on, say, a stock? Don’t donate the shares. Instead, sell the stock yourself so you get the tax benefit from the loss, and then donate the cash proceeds.
If you’re retired or approaching that stage, here’s another option: In return for your charitable contribution, you could get a tax deduction and generate retirement income—by funding charitable gift annuities and charitable remainder trusts.
Next: Charitable Annuities
Previous: Charitable Giving