At Schultz Financial Group (SFG), we view wealth differently through our Four Capital approach. Our team works with you to build your wealth across Four Capitals – Financial Matters, Physical Well-being, Intellectual Engagement, and Psychological Space. This post focuses on two of the four capitals: Financial Matters and Psychological Space. The holiday season is often associated with making charitable gifts which can enhance your Psychological Space as well as potentially provide you with tax benefits.
The holiday season is often associated with making charitable gifts. 2020 has been a unique year in many ways. It is likely that your favorite charitable organizations have been gravely impacted by the Coronavirus pandemic: operations have changed, fundraising events have been cancelled, and the list goes on. However, the beneficiaries of those charities still need help. Consider a few different ways you can help by being charitable this holiday season and understand a few key benefits of donating in 2020.
Charitable deductions allowed up to 100% of AGI in 2020
In 2020, a taxpayer may offset his AGI with charitable gifts. Cash donations to qualifying charities are tax deductible up to 100% of Adjusted Gross Income (AGI). Typically, the deduction is limited to 60% of AGI. To receive this tax deduction, the taxpayer must itemize deductions. It is also worth noting that Donor Advised Funds and Private Foundations are not considered qualifying organizations.
Taxpayers who do not itemize their deductions are eligible to receive a $300 above-the-line charitable tax deduction. A cash donation of up to $300 (per tax return) to a qualifying charity can be recognized as an above-the-line deduction on the 2020 tax return.
While Required Minimum Distributions (RMDs) have been waived for 2020, Qualified Charitable Distributions (QCDs) are still a valid gifting strategy. QCDs are charitable gifts made from IRAs. Since the donation is made with pre-tax dollars, the taxpayer will not receive a tax deduction for these gifts. With the waiver of RMDs in effect, this strategy is less enticing in 2020. However, for taxpayers with large IRAs, this strategy is still effective in reducing the size of the IRA and subsequently lowering the amount of future RMDs.
Consider bunching your charitable donations
Bunching charitable donations is a strategy that boosts charitable donations in a single year with the goal of increasing itemized deductions to an amount above the standard deduction. For example, consider the amount you usually donate annually to charities. Rather than donating that amount, donate double or triple that amount in 2020 with the idea of donating less in future years. This will boost your charitable donations in 2020, allowing you to take advantage of the deductions mentioned above.
If you would like to increase this year’s charitable deduction but would prefer the donations to charity be spread out over several years, you may consider a Donor Advised Fund. Donor Advised Funds are charitable brokerage accounts. Upon opening the account, a taxpayer may contribute cash or investment securities. The taxpayer receives a charitable deduction in the year of the contribution. Assets may be invested within the account. Charitable gifts may then be granted to various charities at any time.
Donating cash versus investment assets
Cash donations have higher deduction limits and can provide a greater tax benefit than donating stock or other investment assets. However, it is worth considering a donation of appreciated investments, such as stocks and mutual funds, with your tax adviser. Donating appreciated stocks is an effective way to negate future tax liability if the taxpayer were to sell the stock.
A taxpayer should not gift investment assets that have declined in value since acquiring it. Generally, the taxpayer would have a greater tax benefit in selling the asset, recognizing the loss, and donating cash than they would in donating the asset.
Know the organization you are gifting to
Gifting to IRS-recognized section 501(c)(3) charitable organizations is the best way to ensure your donation is tax-deductible. Taxpayers may use the IRS’ tax exempt organization search tool to find such charities.
Donations made to individuals are not tax-deductible. If you have a friend or family member fundraising for a charity, consider making your donation payable directly to the charity rather than gifting money to the individual.
Before gifting your hard-earned money to a charity you have never heard of, do your research. You can also view this blog for tips on avoiding donation scams.
Gifting to charity can be an excellent way to give back to causes you care about and may provide you with tax benefits. Before making a sizeable donation, we suggest you to consult with your tax adviser on the best charitable giving method for you.
Alyssa Yocom is an Associate Wealth Manager with Schultz Financial Group Inc.
Schultz Financial Group Inc. (SFG) is a wealth management firm located in Reno, NV. Our approach to wealth management is different from many other wealth managers, financial advisors, and financial planners. Our team of fee-only fiduciaries strives to help our clients build their wealth across four capitals: Financial Matters, Physical Well-being, Psychological Space, and Intellectual Engagement. We provide family office and wealth management services to clients located in Nevada, California, and other states. If you’d like more information, please check out our website or reach out to us via our contact page.