All too often we leave our charitable giving to the end of the year when the deadline looms for making tax deductible gifts. This may cause us to make hasty decisions about where to give, how much to give and how best to give, leading to sub-optimal choices that aren’t always best for us as donors and the charities we care about. Creating your charitable giving plan early in the year provides the opportunity to be thoughtful about which missions we wish to support, our capacity to invest in targeted organizations, and how changing tax laws may impact giving options. Importantly, charities need support throughout the year and would much prefer not having to stress over whether year-end donations will cover their funding gap as the year comes to a close.
Many donors use assets from their investment and retirement accounts to make charitable gifts. Those accounts are typically invested to varying degrees in the financial markets and subject to volatility throughout the year. We recommend opportunistic gifting during periods of strength rather than risk facing a declining market environment as the calendar runs out. Additionally, some advanced gifting techniques require time, effort, and coordination among your advisors to establish.
What’s new to keep in mind for 2021?
The COVID relief bill that was passed in December of 2020 addressed two of the charitable giving incentives that were part of the original CARES Act through 2021. These are both for cash gifts only and made directly to a qualified charity, which does not include foundations or donor advised funds.
- For individuals and households that do not itemize tax deductions, the CARES Act provided for a permanent $300 above-the-line charitable deduction per household. That has now changed to $300 per person and up to $600 per household.
- For taxpayers who do itemize, the limit on charitable deductions will remain at 100% of adjusted gross income for 2021, instead of the typical 60% limit. This provides a unique opportunity to pair cash gifts and Roth IRA conversions with limited tax liability.
- For all charitable giving, be sure to keep good records as this legislation also enhanced the penalty for overstating donations to be 50% of the deduction from 20% previously.
The CARES Act of 2020 waived the requirement for minimum distributions from IRAs last year, which may have reduced the incentive for some donors to use the Qualified Charitable Distribution (QCD) strategy for their giving. Required Minimum Distributions (RMDs) are back for 2021, so it’s time for those donors to consider if a QCD makes sense as part of their charitable giving plan. The Qualified Charitable Distribution allows donors aged 70 ½ or older to use up to $100,000 of their RMDs to make direct gifts to qualified nonprofit organizations. The benefit of this for the donor who may not need all their RMD for living expenses is to lower their taxable income by the amount of the QCD, and in turn, may reduce their Medicare premiums.
Gifting Appreciated Stock
The stock market proved to be quite the roller coaster ride in 2020 as a result of the great uncertainties surrounding the COVID crisis and many donors may have deferred gifting from their portfolios in the face of such volatility. What a difference a year makes! From the market lows last March, the broad stock indices have made a significant recovery, bringing this strategy back into play. Using appreciated stock for charitable gifts can be a tax-efficient way to manage risk in a portfolio by reducing larger, perhaps overvalued holdings without incurring income taxes on the capital gain. In order to deduct the fair market value of the stock gift, be sure you have held it for at least 12 months. Something to keep in mind if some of your big winners were scooped up on sale during the 2020 selloff.
Developing your charitable giving plan early in the year can help you be a more thoughtful, strategic, and effective supporter of the organizations and missions you care most about. The ways that we give can change from one year to the next as our personal situation evolves, market conditions change, and tax laws are modified. Year-end tweaks are fine as we have better knowledge of our taxable income situation but should be just that, putting a fine point on a charitable giving strategy that has been well thought out and executed optimally throughout the year.
At RegentAtlantic we are passionate about helping our clients plan for their future, including optimizing their philanthropic strategies. If you have questions about charitable giving in 2021 and the years ahead, please be sure to reach out to your Wealth Advisor.
Important disclosure information
Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.
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This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.
RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.