2020 Year-End Charitable Giving Guide
The holidays are a time when many people feel extra motivation to give—to friends, loved ones, and of course, to charity. While few people give to charity solely for tax reasons, effective planning regarding charitable contributions can save on taxes, thereby allowing for greater giving.
The following items are potential charitable giving strategies to consider as we approach year-end:
- Increased giving opportunities created by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act)
- Qualified charitable distributions from IRAs
- Contributing appreciated stock with low cost basis
- Gifting to charity using irrevocable trusts
Beneficial Changes to Charitable Giving Created by the CARES Act
In a year when giving is needed more than ever, Congress has provided some additional incentives for doing so. The passage of the CARES Act on March 27, 2020, instituted the following changes for individual taxpayers.
AGI Limit Raised to 100 Percent
For 2020, taxpayers who itemize deductions can elect to deduct qualified charitable contributions of up to 100 percent of their AGI (this was formerly 60 percent). To qualify, the contribution must be in cash, paid in 2020, and made to a qualifying organization. Lower limits remain in place for noncash contributions. Cash contributions made to donor-advised funds, supporting organizations, and private foundations do not qualify for the increased AGI limit. Contributions in excess of AGI will be carried over for up to five years but will be subject to the 60 percent AGI limitation after 2020.
Noncash contributions that are limited to a lower percentage of AGI, such as 30 percent for appreciated stock, can be combined with qualified cash contributions to reach the 100 percent limitation. While the deduction for the stock donation would be limited at 30 percent of AGI, additional qualified cash contributions equal to 70 percent of AGI could be made to reach the 100 percent ceiling.
Intentionally increasing a taxpayer’s AGI in 2020 would allow for higher charitable cash contribution amounts. There are various ways to achieve this, including converting an IRA into a Roth IRA or selling appreciated property or stock and donating the cash directly to a qualified organization. Strategies such as these will increase AGI and thus allow for a larger deduction to offset what would normally be a taxable event.
$300 Above-the-Line Deduction
Typically, the tax deduction for charitable contributions is only available to taxpayers who itemize their deductions. The Tax Cuts and Jobs Act nearly doubled the standard deduction, greatly reducing the number of taxpayers who itemize. A new $300 above-the-line deduction (a deduction used in computing AGI) for charitable contributions is now available to taxpayers who claim the standard deduction. The maximum deduction is $300, regardless of filing status.
Qualified Charitable Distributions from IRAs to Reduce Future Required Minimum Distributions (RMD)
Although the CARES Act waived the requirement for taking an RMD from an IRA in 2020, qualified charitable distributions of up to $100,000 per year can still be made by those who are age 70.5 or older from their IRAs. A benefit of doing so is the donation from the IRA is excluded from the taxpayer’s AGI and will not affect AGI-based premiums, such as Medicare Part B and Medicare Part D, or AGI-based limits on itemized deductions. In addition, distributions to charity in 2020 will remove future growth on the donated funds from the IRA. These charitable distributions also may reduce the amount of future RMDs.
Contributing Appreciated Stock with Low Cost Basis
One of the most common methods of annual charitable giving is through the donation of publicly traded stock to charity. Stock in which the donor has little to no cost basis is particularly attractive for this purpose. If such stock were sold by the donor, it would incur capital gain. The same stock sold by charity, however, avoids this gain.
Gifting to Charity Through Using Irrevocable Trusts
For taxpayers looking to make a charitable effect while still working toward their wealth transfer goals, using charitable trusts can enable donors to do exactly that.
- Charitable Lead Trusts: Taxpayers can use charitable lead trusts (CLT) to benefit a charitable organization for a term of years by making an annual payment of a specified percent or amount to the charitable organization (lead interest). When the term ends, the remainder of the trust is then distributed to noncharitable beneficiaries, often permitting an ultimate transfer to future generations with little to no usage of gift or estate tax exemption, making this a valuable wealth transfer strategy. Funding a grantor CLT also allows the donor to take a charitable deduction (subject to 30 percent of AGI limitations) in the year of funding for the value assigned to the lead interest being paid to charity.
- Charitable Remainder Trusts: A charitable remainder trust (CRT) is essentially the opposite of a CLT. CRTs first benefit noncharitable beneficiaries (lead interest) while the remaining trust assets at the end of the term pass to a charitable organization. The donor is subject to gift tax on the value assigned to the lead interest being paid to noncharitable beneficiaries but also is entitled to a charitable deduction for the value assigned to the remainder interest going to charity in the year the trust is funded.
There are many factors to consider when it comes to charitable giving and charitable planning. Reach out to your BKD Trusted Advisor™ or submit the Contact Us form below to discuss whether any of these options could support your charitable and wealth transfer goals. Also keep in mind the charitable contribution documentation requirements as outlined in our 2020 Quick Reference Chart.