This holiday season, while we’re creating fond memories with our families, it can also be the time we look for ways to give back to others. Understanding the available tax benefits might encourage giving more to our favorite non-profit. Different tactics provide different benefits, so let’s go over three ways to save money on taxes and provide much-needed support to your favorite charitable organizations.
Cash donation. Send a gift to your organization of choice by December 31st. Be sure to hold on to your cancelled check or credit card receipt as proof of your donation. Often, the organization will send you a receipt as well. If you contribute $250 or more, you will need that receipt or another form of written acknowledgement from the charity.
The CARES Act that passed in March 2020 created a temporary enhanced tax deduction for cash charitable gifts up to $300 for single or married filers. In 2021, Congress extended the write-off and boosted it to $600 for married filers. You do not need to itemize your deductions to take advantage of this benefit. Itemization happens for taxpayers that have deductions that total more than the standard amount. For 2021 the standard deduction is $12,550 for single taxpayers and $25,100 for taxpayers who are married filing jointly. If you make a charitable contribution of over $300/$600, you will only be able to deduct the full amount of your contribution if you itemize deductions on your 2021 taxes and don’t take the standard deduction. If you do itemize, the CARES Act allows a charitable contribution of cash up to 100% of Adjusted Gross Income (AGI) for 2020 and 2021. Previously, the maximum was limited to 60% of your AGI.
Appreciated assets. Gifting stocks or other investments that you have owned for more than one year and that have an unrealized capital gain is an often-overlooked strategy. This trend is popular this year, and in all years where stocks, real estate, and other assets have appreciated rapidly. Your charitable contribution deduction is the fair market value of the asset on the date of the gift, not the amount you paid for the asset. Therefore, you avoid having to pay capital gains taxes on the appreciation. However, avoid donating investments that have a current loss in value. It is best to first sell that asset and then donate the proceeds, allowing you to take both the charitable contribution deduction and claim the capital loss.
Capital gains tax rates are different from ordinary income tax rates. If you held an asset for more than 12 months and sell it, any gain qualifies as a long-term capital gain. If you are in the 12% tax bracket or below, your tax rate for capital gains is 0%. If you are between the 22% bracket and 35% bracket, your tax rate is 15% on your capital gains. If you are in the highest tax bracket, the rate is 20%. If you sell an asset that you held for less than 12 months, you will pay ordinary income taxes on that gain.
Qualified Charitable Distribution (QCD). If you are more than 70 ½ years old, you can use funds from your Traditional IRA or other pre-tax retirement accounts to contribute to your favorite charity and not pay any taxes. Amounts up to $100,000 can be transferred tax free directly to a charity. The distribution stays off your reportable taxable income for that year and you do not report your charitable contribution on your tax return. If you are age 72 or older, using this method can also satisfy all or part of your Required Minimum Distribution (RMD). This is a wonderful option for those wanting to enhance their charitable giving, not pay any taxes on that gift, and still take a standard deduction.
As the year draws to a close and we look back at the benefits that we may have experienced throughout the year, helping others may allow us to share some of what we’ve gained. This charitable giving philosophy can set an example and provide a valuable life lesson for the next generation. The effects of having the next generation or even multiple generations witness the spirit of generosity at work is incredible. If we reduce our tax burden as well, even better!