Year-End Moves for Charitable Donations
'Tis almost the season for charitable giving. Besides helping a worthy cause, your donations may qualify for a festive write-off on your 2020 tax return if you qualify. Here are five ways to boost your deduction for charitable contributions if you itemize.
1. Bunch Contributions
Under the Tax Cuts and Jobs Act (TCJA), for 2018 through 2025, the standard deduction was increased while certain itemized deductions were curtailed or suspended. As a result, more taxpayers are taking the standard deduction instead of itemizing.
One tax-smart move is to “bunch” donations in the tax years that you plan to itemize deductions. That way, you can reap tax rewards for your generosity by making donations that you can write off as itemized deductions.
If you expect to itemize deductions for 2020, consider increasing your charitable gift-giving at year-end. Prior to the TCJA, the annual deduction for charitable contributions was limited to 50% of your adjusted gross income (AGI). Effective for 2018 through 2025, the TCJA raised this threshold to 60% of AGI. Now, under the CARES Act, the threshold jumps to 100% of AGI for 2020. Any excess is carried over for up to five years.
If you expect to claim the standard deduction for 2020, you might consider postponing large charitable gifts to 2021 or beyond, when you may be itemizing deductions. That way, you can still derive tax benefits for your donations. (See “Above-the-Line Cash Donations” at right for an opportunity to take a small deduction this year even if you don't itemize.)
2. Donate Securities
The basic rule is that your deduction for donating appreciated property, such as securities, is equal to the initial cost of the property. However, if you donate securities that would have qualified for long-term capital gains treatment if you sold them instead — in effect, you've owned the securities longer than one year — you can write of their current fair market value (FMV). Plus, there's never any tax due on the appreciation in value when you use this strategy.
Review your portfolio to decide which securities to donate. For example, if you bought stock for $2,500 five years ago that's worth $10,000 when you donate it, your write-off is the FMV of $10,000.
3. Learn How Quid Pro Quo Contributions Work
In a charitable giving context, the term “quid pro quo” is used to describe a contribution where you receive goods or services in return. Here, the deductible amount is limited to the difference between:
- The contribution, and
- The value of the benefit received.
For instance, if you paid $500 for you and your spouse to attend a fundraising dinner early in 2020 and the meal for the two of you was valued at $200, you may deduct $300. Proper substantiation is critical.
Important: This rule doesn't apply to tokens or trinkets of little value. For instance, if you donate $100 to a charity and receive a $5 coffee mug with the charity's logo on it, the entire $100 is deductible.
4. Consider Qualified Charitable Distributions
If you're at least 70½ years old, you can transfer up to $100,000 of funds directly from your IRA to a charitable organization. There's no tax on this qualified charitable distribution (QCD), but the contribution isn't deductible either. The maximum QCD is doubled to $200,000 for joint filers if each spouse qualifies on his or her own.
Usually, retirees who must take required minimum distributions (RMDs) from their IRAs rely on this strategy to avoid the tax on their RMDs. But the CARES Act suspends the RMD rules for 2020. Nevertheless, you still might use a QCD for other tax purposes, such as avoiding or reducing the net investment income tax (NIIT).
5. Make Eleventh-Hour Donations
Generally, you deduct contributions to qualified charitable organizations in the tax year in which the contributions are made. Therefore, you can technically deduct a contribution made late in December — even if you donate just before the clock strikes midnight on New Year's Eve.
What's more, this rule covers donations made by credit card. For instance, suppose you make an online donation to a charity by providing your credit card number on December 31. That donation is deductible on your 2020 return, even though you don't actually pay the credit card charge until 2021.
Above-the-Line Cash Donations
Generally, charitable deductions are claimed as itemized deductions on your tax return. However, the CARES Act authorizes an above-the-line deduction of up to $300 of the monetary contributions made by an individual in 2020. This deduction is allowed even if you don't itemize and, instead, claim the standard deduction.
If you itemize, the first $300 of your charitable contributions is allocated to this above-the-line deduction. This limited-time tax break means that both non-itemizers and itemizers can save tax this year by giving to charity at year-end.
End 2020 on a Positive Note
From the health crisis and job losses to natural disasters, 2020 has been a difficult year. Donating to a charity can help those in need, while also providing you with a possible tax benefit. These are just five ideas to consider. Contact Bob to develop a year-end plan that suits your philanthropic and tax-planning goals.