By: Michael Allbee, CFP®, Senior Portfolio Manager
Did you miss out on #GivingTuesday? You still have time to take advantage of two temporary perks for cash gifts to charities before they expire at year-end.
The first perk for those that itemize deductions, allows 100% of cash gifts (including by check, credit card or debit card) to be deductible in 2021 (this also applied for 2020). Normally the limit is 60% of adjusted gross income (AGI). So, a person with $200,000 AGI, can now deduct up to $200,000 if charitable gifting is made in cash, where normally they would be capped at $120,000 (60% limit). These charitable contributions CANNOT be used for Donor Advised Funds or 509(a)(3) supporting organizations.
For those that already maxed out your charitable gifting (up to $100,000) from your traditional and/or inherited IRAs by using Qualified Charitable Distributions (QCDs) and want to gift more to a charity, you may want to consider taking the remainder gift from your tax-deferred retirement account (if you are over age 59.5 to avoid penalties) which would increase your AGI since the distribution is treated as taxable income but simultaneously offset that income via the 100% deduction for the cash gift. This strategy would be especially effective if some of the IRA changes under consideration before Congress become law. Currently, in its Build Back Better legislation, Congress is proposing restrictions on so-called “mega IRAs” with balances over $10 million. The legislation would mandate required distributions of 50% of the amount exceeding $10 million and require distributions of 100% of the IRA balance exceeding $20 million—potentially creating major tax events for some individuals in the coming years.
The second expiring perk is the opportunity to deduct cash gifts to eligible charities of up to $300 for single tax-filers and $600 for couples against taxable income, even if you claim the standard deduction (great news for the 90% of households that take the standard deduction each year). Let’s say a married couple with an effective tax rate of 25% jointly donated $750 throughout the year. If they take the standard deduction, they’d be able to deduct the full $600, lowering their federal tax liability by $150. Keep in mind that donations made to individuals are not tax-deductible (i.e., GoFundMe campaigns).
Charitable giving provides you the opportunity to create a meaningful legacy and support the causes that are important to you. Consider speaking with your financial professional at BFSG for guidance around your philanthropic goals and assistance on the execution.
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