As the year’s end draws nearer, we want to remind everyone that 2021 is a great year to give to their favorite charities because of favorable market conditions and tax laws.
The S&P 500, Dow and Nasdaq have all been on solid upward trajectories (with some bumps along the way) since the 2009 recession — and all three set record closing levels on Nov. 1. So, many investors have appreciated assets in their portfolios. With markets high, this is a great moment to consider gifts of appreciated securities.
If you’ve already fulfilled your charitable giving plan for the year, you might consider planning ahead. Donor advised funds (DAF) allow you to front-load several years’ worth of donations into your fund now and grant the money to an organization later. If the amount exceeds the standard deduction, you can immediately claim a tax-deductible charitable contribution.
Using a DAF not only can increase tax deductions, it also eliminates capital gains taxes on the assets transferred to the fund (if they are long-term gain assets). This means you can make a larger donation than if you were to sell the shares and donate the cash proceeds. A DAF also lets you decide once per year how much to give to charity, rather than revisiting the issue each time a giving opportunity presents itself.
The 2020 CARES Act’s tax incentives for charitable giving extend through the end of 2021.
There are incentives for cash donations:
- People taking the standard deduction can claim an additional above-the-line deduction of up to $300 for charitable gifts made in cash ($600 for married couples). Be aware that while the 2020 deduction reduced adjusted gross income (AGI), the 2021 deduction does not.
- People who are itemizing their deductions can deduct up to 100% – instead of the usual 60% – of their AGI for cash contributions.
- Corporate donors also have a higher cash contributions limit. They can deduct up to 25% of taxable income (up from 10%).
DAF holders can still deduct up to 60% of their AGI for cash donations and up to 30% of their AGI for appreciated securities to a DAF. Standard carryover rules apply, so if 2021 donations exceed your AGI deduction, you can carry forward excess deductions for up to five subsequent tax years.
Since taxpayers can currently deduct up to 100% of their AGI for cash charitable contributions, this means those who are 59½ or older can reap benefits even beyond the $100,000 IRA qualified charitable distribution. They can take a cash distribution from their IRA, contribute the cash to charity and offset the tax attributable to the distribution by taking a charitable deduction equal to 100% of their AGI for the tax year. The total tax savings will also be depend on whether they itemize deductions. This could be a way to save on taxes for a large contribution if you are 59½ to 70½ and don’t depend on existing retirement funds.
If your itemized deductions are typically near the standard deduction level, it could be beneficial to combine 2021 and 2022 charitable contributions. If you double your gifts this year, it will give you higher itemized deductions. And then next year, when you don’t give since you already have, you can take the standard deduction.
Of course, make sure you consult your CPA and financial advisor on your charitable giving plans. They can help you determine the charitable strategy that best fits you!
Laura is a Senior Wealth Manager and the Founder of LWP. She has a master’s degree in tax and is an excellent listener. While she is a sophisticated financial planner with experience in complex issues, her priority is ensuring a financial plan works for people.