Maximize tax savings with year-end giving
By Alison O’Carroll, director and philanthropic counsel, Community Foundation for Greater Atlanta
The end of the year is known as the giving season, and this year it’s possible to increase charitable giving while also decreasing potential taxes. There are some unique charitable giving opportunities available only in 2021 and other tax-wise giving strategies to consider.
Some of the favorable tax changes made by the CARES Act, passed in March 2020, have been extended by Congress for 2021, only.
- For those who itemize deductions in 2021, the cap on annual giving for gifts of cash is 100% of adjusted gross income (AGI) instead of the usual 60% of AGI limit. That means a donor who uses all of her available deduction for qualified gifts would pay no federal income tax in 2021.
Tip: This may be the year to convert a traditional IRA to a Roth IRA. Give a gift of cash to a public charity at the same time, thus offsetting the income tax liability of the Roth conversion using this maximum deduction for cash gifts.
- Donors who claim the standard deduction still have an above-the-line deduction for charitable gifts. The amount remains the same for an individual ($300) but married couples filing joint returns can deduct up to $600, an increase from last year.
In both of these cases, the gift must be cash and made to a public charity (excluding donor-advised funds).
Other tax-wise giving strategies:
Gifts of appreciated stock. While the stock market has been volatile this year, it is ending on a high note in many sectors. Gifts of appreciated stock owned for more than one year offer great tax benefits and can be made to public charities as well as donor-advised funds (DAFs).
A gift of stock or mutual fund shares avoids all capital gains tax, which enables donors to give up to 20% (for some, 23.8%) more than if they sold the stock and donated the cash proceeds. In addition, the charitable deduction is for the full fair market value, providing a deduction on income that was never taxed. This same giving strategy applies to other appreciated assets as well, such as real estate, mutual fund shares, and closely-held business interests.
Consider an IRA Charitable Rollover. There is no longer a required minimum distribution (RMD) waiver. As a result, anyone age 72 or older as of December 31, 2021, must take an RMD by year-end (unless this is the first RMD, in which case the deadline is April 1, 2022).
Donors can meet this RMD requirement and support philanthropy through an IRA Charitable Rollover gift. The IRA Charitable Rollover gift essentially allows donors to have a charitable deduction for a gift even when you use the standard deduction.
For people 70½ or older, distributions of up to $100,000 can be made from a Traditional (or Roth) IRA each year to a public charity (excluding donor-advised funds) and the amount will not count as taxable income.
Bunch gifts to charity. Instead of giving smaller gifts to nonprofits every year, some donors choose to “bunch” gifts by donating a larger amount in an alternate year to “beat” the standard deduction. This allows taxpayers to itemize charitable gifts and potentially secure tax advantages.
Cash gifts can be made up until the last day of the year, but the other strategies may need a little more time. Check with a financial planner to determine timing and other tax planning strategies.