If you’re charitably inclined, let’s make sure you’re tax-efficient in the process. Until the SALT $10K cap is repealed, you may not be reaping the full benefit of your charitable gifts.
On the other hand, it’s not advisable to gift to charity only for the tax benefit. We’ve summarized a handful of strategies to consider given current tax legislation – let us help you through the process!
With the increase in the standard deduction from the TCJA of 2017 to $25,100 for married couples in 2021, you can maximize your tax benefits from a charitable contribution if you itemize your deductions. What does this mean? With “bunching,” you accelerate or group your charitable giving in a single year to surpass the standard deduction. It’s not a matter of marginally exceeding the threshold – the more you exceed the standard deduction, the greater the benefit.
If you take the standard deduction (i.e., don’t itemize), you can take up to a $600 above-the-line deduction if you’re married filing jointly in 2021 (up from $300 in 2020). Qualifying donations include cash or cash equivalents. However, contributions to a Donor-Advised Fund (see below) do not qualify.
If you do itemize, the limit increased to 100% (up from 60%) of an individual’s AGI through 2021 for cash contributions to certain public charities. Any amount gifted beyond the 100% limitation may be carried over and used in the next five years with the previous 60% AGI limitation.
Donor-Advised Fund (“DAF”)
A DAF is like a charitable investment account – the assets continue to grow tax-free while invested in the account. DAFs have low administrative fees, and you can recommend grants to any IRS-public charity. A DAF typically accepts cash, appreciated securities, and sometimes alternative or private investments. You can also provide instructions as to how you want the money distributed. Example: Donate $40K to receive an immediate tax deduction but add instructions to distribute $10K each year for 4 years.
Charitable Remainder Trust (“CRT”)
A CRT is an irrevocable trust that generates an income stream for you (as the donor) or a specified beneficiary (must be 28 or older). The remaining donated assets go to a specified charity or charities. This is considered a “split-interest” vehicle and is eligible for a partial tax deduction. The type of trust, term, projected income payments, and assumed rate of return (as determined by the IRS) determine the deduction. The income stream for the non-charity beneficiary can be for life or a term of years (no more than 20). Whatever is left goes directly to charity tax-free. You can also structure this to provide income for two generations. However, this is not advisable if you are subject to estate tax as you lose the estate tax marital deduction. There are two types of CRTs:
- Charitable remainder annuity trust (CRAT)
- Charitable remainder unitrust (CRUT)
This is an excellent vehicle if you want an immediate tax deduction and require an income stream for yourself or a non-charity beneficiary.
Qualified Charitable Distribution (“QCD”)
This is for individuals 72 or older and allows you to satisfy the RMD from your IRA. Be sure to have the check made payable to a qualified charity. In this way, the QCD excludes the amount donated from your taxable income. Keeping your taxable income lower may be beneficial when it comes to the taxation of your Social Security benefits, Medicare Part B premiums, and avoiding the 3.8% net investment income surtax. While you don’t have to itemize to take the QCD, you cannot also claim the distribution as a charitable deduction. There are nuances to consider, such as contributions to an IRA if you’re still working, which will reduce the QCD amount. Also, the maximum limit is $100K annually.
Does all of this talk surrounding DAFs, CRTs, QCDs have your head spinning? If you’re charitably inclined, it’s a worthwhile exercise to connect with a professional, especially given the legislative landscape. Whether it’s connecting with your financial advisor, estate planning attorney, or your CPA, maximizing your gift from a tax perspective will generate a greater benefit for all. So let us know if we can help!