December 29, 2020
As the year draws to a close and people are celebrating the holidays, 2020-style, this is a great time to consider those who are less fortunate. Economic restrictions have made this year more difficult for many, so your thoughts may turn to supporting your preferred charities. With good planning, you may be able to save taxes as well for both modest good-hearted donors and large tax-savvy donors alike
STANDARD DEDUCTION vs ITEMIZING BY “BUNCHING” CHARITABLE CONTRIBUTIONS
Your first step should be to contact your tax advisor and go over the information you’ll report on your tax return you’ll file next year. Will you take the standard deduction or itemize deductions? For 2020, the standard deductions are $12,400 for single filers and $24,800 for married couples filing joint tax returns. Those numbers are somewhat higher for taxpayers who are blind, over age 65, or both. On your tax return, you’ll take whichever is higher: standard or itemized deductions.
For example, suppose Mel and Nancy Parker have modest medical bills, no mortgage interest, and only $8,000 in state and local taxes, among potential itemized deductions. They usually give $15,000 to charity at year-end. The Parkers will be better off with a $24,800 standard deduction, so they’ll get no tax benefit from donating $15,000 at yearend because it is far less than the $24,800 amount. Instead, this couple will be better off making their donations in January, so they’ll take the standard deduction for 2020 and might be able to take a large itemized deduction for 2021. (Taxpayers who take the standard deduction can claim a special $300 charitable deduction in 2020, $600 for joint filers, so the Parkers should donate at least $600 in 2020.)
By “bunching” two $15,000 contributions in 2021, including the one intended for 2020 but delayed until January 2021, and the normal December 2021 contribution, the $30,000 amount in one year will exceed the $24,800 standard deduction and make it worthwhile to itemize. This would allow Mel and Nancy to maximize use of the standard deduction in 2020 and use of itemizing in 2021 (based upon current rules).
On the other hand, suppose Ron and Sarah Thompson have the same financials as the Parkers in 2020, except they typically donate $40,000 a year to Torrance Memorial Medical Center and/or other charities. The Thompsons will gain from itemizing in 2020, so they should make their contribution(s) before the year ends.
GIVING CASH OR STOCK TO A CHARITABLE ORGANIZATION
Once they decide to contribute in 2020, the Thompsons have to make some choices. Should they make their contributions in cash? (Cash donations include those made by check as well as by credit or debit cards.) Cash donations are simple to execute, and there is no need to pay any fees for arranging the gift.
Moreover, legislation passed in 2020 allows tax deductions up to 100% of adjusted gross income (AGI) for cash contributions, this year only. Normally, such deductions are capped at 60% of AGI.
Therefore, if you wish you can zero out your tax bill by calculating the amount to donate that would offset all the taxable income you’d otherwise report. That would work as long as you don’t donate more than your AGI. (Excess donations can be carried forward and deducted in the future, for up to five years.)
That said, zeroing out your tax bill might not be ideal. You might want to calculate how much to deduct to get you out of the 37%, 35%, or 32% federal income tax brackets, bringing you down into the 24%, 22%, or even the 12% bracket. The higher the tax bracket, the more valuable the deduction. Paying tax at relatively low rates might be acceptable if you’ll get to hold onto some cash, instead of depleting cash reserves with a full AGI donation.
Another strategy is to go over your investment portfolio and sell assets now trading at a loss, then use those dollars for deductible charitable contributions. You also can deduct up to $3,000 worth of net capital losses on your 2020 tax return; any excess capital losses can be carried forward, either to be deducted in the future or to offset capital gains you’ll eventually take, making some realized gains tax-free.
A WORD OF CAUTION FOR LARGE CHARITABLE DONORS USING A DONOR ADVISED FUND
This 100% tax break doesn’t apply to gifts to private foundations or donor-advised funds (DAFs). Nevertheless, you might want to contribute to a DAF anyway, giving appreciated assets instead of cash. When you donate appreciated assets held for more than one year, you’ll receive a deduction for the current market value. In effect, you’ll get a 100% tax break for giving away holdings such as stocks that have risen in price, even though those stocks would be worth 85% or less to you, after a taxable sale.
If you give assets to a DAF, you can control the timing. The Parkers, mentioned above, might give $45,000 of appreciated long-term assets to a DAF this year, instead of their usual $15,000 per year. They could itemize deductions this year for a welcome tax break. Then they could spread out $45,000 worth of charitable grants from the DAF to charities such as Torrance Memorial Medical Center over the next three years.
Three resources we use at our firm for donor-advised funds are Renaissance Charitable Foundation, Schwab Charitable, and Franklin Templeton.
GO FROM PRE-TAX TO NO TAX USING QCDs FOR IRAs
Another strategy to consider is available to taxpayers age 70-1/2 or older. They can make Qualified Charitable Distributions (QCDs) directly from their IRAs to qualified charities. (Again, donations to DAFs and private foundations don’t qualify as QCDs.)
You will see it listed here as part of Ed Slott’s 2020 Year-End Retirement To-Do List
With a QCD, you won’t be able to deduct the donation. On the plus side, QCDs don’t generate taxable income. Therefore, if you are in the right age range, you can use QCDs by year-end to support charities such as Torrance Memorial Medical Center, hold onto cash in taxable accounts, move pre-tax dollars from traditional IRAs without owing tax, take the standard deduction if that’s the best option for this year, and reduce future taxable required minimum distributions (RMDs). Remember, the QCD is still an option for 2020 even though RMDs have been waived as part of the CARES Act, and the $100,000 limit still applies. You'll find an example of a QCD at Torrance Memorial Foundation by clicking here. But be sure to contact your tax advisor or our firm at www.CRAdvisors.com to see if QCDs in 2020 will make sense for you.
By Christian Cordoba
CERTIFIED FINANCIAL PLANNER™
Founder, California Retirement Advisors
This content is developed from sources believed to be providing accurate information, and provided by California Retirement Advisors. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. California Retirement Advisors, nor any of its members, are tax accountants or legal attorneys and do not provide tax or legal advice. For tax or legal advice, you should consult your tax or legal professional. #