Charitable giving has been negatively impacted in recent years, starting with the Tax Cuts and Jobs Act (TCJA) in 2017 that increased the standard deduction, which resulted in fewer taxpayers itemizing deductions. Congress responded to these challenges by making changes to incentivize charitable giving for 2020 and 2021.
Adjusted Gross Income (AGI) Limitations and New Above-the-line Deductions
In last year’s CARES Act for 2020 and 2021 only, individual charitable deduction limitations for cash donations to certain organizations have increased to 100% of AGI (up from the previous 60%). This will apply to the taxpayer’s elected donations to all charitable organizations except donor advised funds (DAFs), supporting organizations, or private foundations. This restriction is intended to get cash in the hands of charities that will use the funds now, rather than to pool or defer giving. In 2021 the above-the-line deduction is $300 per taxpayer resulting in a maximum of $600 for joint filers.
Gifting of Appreciated Stock
Charitable donations can still be beneficial from a tax standpoint. The most efficient method for making a charitable contribution is to make the contribution using appreciated securities. 2021 could be a great year to make contributions using appreciated securities with the current stock market. A taxpayer that makes a charitable contribution using appreciated securities will receive a tax deduction for the full fair value of the security and will not be required to pay income tax on the built-in appreciation if the security has been held longer than one year. The itemized deduction for contributions of appreciated securities is limited to 30% of AGI, while contributions of cash have higher limits.
Qualified Charitable Distributions (QCDs) from an IRA
The increase in standard deduction has made Qualified Charitable Distributions (QCDs) from IRA accounts a more valuable tool for individuals to manage their charitable contributions. A QCD is a taxable distribution from an IRA owned by an individual that is over the age of 70½ that is instead directed to a qualified charity. This amount, up to $100,000 per tax year, is not taxable income to the individual taxpayer. Making a qualified distribution allows those who are now taking the standard deduction to still reap a direct tax savings by giving to charity; however, QCDs cannot be used to make contributions to DAFs.
Hopefully, the utilization of tax techniques and CARES Act incentives will keep charitable giving strong while also providing tax benefits to individuals who previously felt they were ineligible. Consider current and future income levels, tax rates, and other deductions when planning your charitable giving to get the most bang for your buck.
Matthew Fox is a Certified Public Accountant and Senior Manager at Brown Schultz Sheridan & Fritz.