Tax changes may impact your year-end giving
By Alison O’Carroll, JD, MBA, director and philanthropic counsel, Community Foundation for Greater Atlanta
As the year comes to a close, many individuals are looking for ways to minimize taxation and maximize their philanthropy. There are some unique charitable giving opportunities available only in 2020 and other tax-wise giving strategies to consider.
The CARES Act, passed March 2020 in response to the coronavirus pandemic, made the following two changes:
- For those who itemize their deductions in 2020, the cap on annual giving for gifts of cash increased from 60% of adjusted gross income (AGI) to 100% of AGI. That means a donor who uses all of their available deduction for qualified gifts would pay no federal income tax in 2020!
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 can still deduct up to $300 in charitable contributions in 2020 through a special, above-the-line deduction.
In both of these cases, the gift must be cash and made to a public charity. (Note: gifts to private foundations, supporting organizations and donor-advised funds do not qualify).
Other tax-wise giving strategies:
Gifts of appreciated stock. While the stock market has been extremely 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 nonprofit organizations.
You avoid all capital gains tax, which enables you to give up to 20% more than if you sold the stock and then made a cash donation. In addition, the charitable deduction is for full fair market value, meaning you receive a deduction on income that was never taxed.
Note: 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. As part of the CARES Act, most individuals do not have to take a required minimum distribution (RMD) from their IRAs in 2020. However, the IRA Charitable Rollover gift opportunity still lives and its benefits remain. The Rollover gift essentially allows you to have a charitable deduction for a gift even when you use the standard deduction.
If you are 70½ or older, distributions of up to $100,000 may be made from a Traditional or Roth IRA each year to a public charity and the amount will NOT count as income on your tax return. To qualify for this special tax treatment, the gift must be made to a 501(c)(3) public charity (private foundations, supporting organizations, and donor-advised funds do not qualify), the funds must be transferred directly from the IRA to the charity, and no benefit can be received in exchange for the gift.
“Bunch” your gifts. With this strategy, you give a larger amount to charity this year than you might otherwise do so that you “beat” the standard deduction and can itemize your charitable gift. You might consider the “bunching” strategy for a larger, one-time gift in lieu of smaller gifts made over several years.
Cash gifts can be made up until the last day of the year, but the other strategies need a little more time. We encourage you to start your planning now!