Our values tend to guide many of our financial decisions, including our charitable giving goals, so it’s natural to incorporate both into a holistic plan. And with the giving season nearly upon us, now is an excellent time to review the following charitable giving strategies with your advisor to help maximize their impact not only on your own financial picture but also for the causes most important for you.
STRATEGY:
Cash
Donation via cash, check or credit card to the charity of your choice.
When can it make sense?
In 2021, you can take a $300 deduction (or $600 for married couples filing jointly) for cash donations that go directly to charity. Usually you’re required to itemize your tax return to qualify for charitable deductions, so this year represents a pandemic-related exception for you to claim cash contributions you may not have been able to before. Also, in most years, the maximum deduction for charitable contributions made in cash to a qualifying charity is equal to 60% of adjusted gross income (AGI). In 2021, however, the maximum deduction is equal to 100% of AGI.
STRATEGY:
Appreciated Securities
Shares of publicly traded stock (or mutual funds or ETFs) you’ve held for longer than a year and that are worth more today than they were when you purchased them.
When can it make sense?
You may have large unrealized gains, especially if you bought equities at the start of the pandemic. Giving appreciated stock allows you to donate (and deduct) its current market value while also eliminating capital gains taxes you might otherwise owe. If you were going to support a cause anyway, this approach can be a tax-efficient way to divest highly appreciated stock or rebalance back to your target allocation. Going through a DAF (see below) can further maximize the tax benefit.
STRATEGY:
Bunching
“Bunching” involves loading more than one year of donations into
a single year, alternating years that you donate but giving more when you do, so that you exceed the standard deduction.
When can it make sense?
This strategy may make sense if, without charitable contributions, you would take the standard deduction. It is only by exceeding this amount that your charitable contributions provide a current tax benefit. By grouping multiple years of contributions into one year, you help maximize the tax-savings value of your deductions by having as little as possible of your charitable contributions “wasted” just getting your total itemized deductions up to your standard deduction amount. This doesn’t need to mean a change in your level of giving, just the timing.
STRATEGY:
Qualified Charitable Distribution (QCD)
A non-taxable IRA distribution that taxpayers over age 70 1⁄2 can send directly to a qualified charity.
When can it make sense?
Even though required minimum distributions (RMDs) from your IRA don’t begin until 72, you can make QCDs once you reach 701⁄2 (actual age). QCDs exclude the IRA distribution from income entirely. While taking a charitable deduction for QCDs is not allowed, the ability to exclude the income from the start is advantageous for those not in a position to itemize. QCDs can help itemizers and non-itemizers alike by helping to minimize AGI and MAGI, to which many other benefits (e.g., credits) and additional costs (e.g., Medicare premiums) are tied.
STRATEGY:
Donor Advised Fund (DAF)
An account in a private fund where you deposit assets and from which you make contributions to charitable organizations over time.
When can it make sense?
A third-party sponsoring organization administers the account and legally controls the funds in it, but you recommend how to invest assets and where to donate them. Because DAFs allow you to take a tax deduction for contributions to the account in the current tax year even if the money isn’t distributed to charities until later, they can be particularly powerful if you know you will be in a much higher tax bracket in a given year. That way you can bunch contributions at a time when the charitable deduction is most advantageous to you while still maintaining your future giving.
Informational purposes only. Should not be construed as specific investment, accounting, legal or tax advice. The strategies above are described generally and are not intended to be specific to any client. Clients should speak with their advisor based on their individual circumstances. Certain information is based on third-party data which may become outdated or otherwise superseded. Third-party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed.
© 2021 Buckingham Strategic Partners, LLC
