As 2020 mercifully nears its end, now is the time to make key strategic financial moves before the calendar rolls over to 2021. Recently, we provided a series of tax planning tips for people who made more money this year, who made less or who stayed roughly the same.
Now, we want to look at charitable giving opportunities that you can take advantage of before the year ends. Charitable contributions are always good for tax deductions, and The CARES Act that was passed as the mid-year stimulus package offers some unique charitable giving benefits that you will definitely want to consider.
The CARES Act includes specific tax incentives that will expire on December 31, 2020, making this year’s charitable giving opportunities perhaps even more beneficial than ever. Let’s look at some of the details you should know.
If you itemize your deductions, then your cash contributions to public charities can be deducted up to 100% of your adjusted gross income (AGI). This is an increase of what is normally up to a 60% deduction. If you do not itemize, your cash contributions are deductible “above the line” up to $300. This is a dollar-to-dollar reduction of your taxable income.
If your corporation contributes cash to public charities, the contributions are deductible up to 25% of your taxable business income. This is up from the normal 10%.
The CARES Act temporarily suspended Required Minimum Distributions (RMDs) for people 70+ with retirement accounts. This is set to end when 2020 is over, but you can still use your retirement assets until then as an excellent source of tax-deductible charitable giving. It can be done during your lifetime or as part of your estate plan.
If you are still taking your RMD this year or next, then you will want to consider donating to a Qualified Charitable Distribution. This is a direct transfer of IRA funds to a qualified charity. A QCD excludes the amount donated from taxable income rather than your IRA distribution being considered taxable income by the IRS.
Charitable bunching is a strategy that allows you to “bunch” two years of charitable contributions into one year. The advantage of this approach is to itemize everything in Year 1 and then benefit from the higher Standard Deduction limits in Year 2.
You will want to consider donating to a Donor-Advised Fund. DAFs allow taxpayers to set aside funds into a charitable account and receive an immediate tax deduction. However, those funds can still be held in the account and not donated to charity right away. It all depends on the DAF and how the money is managed over time. For you, though, the tax benefits are immediate.
If you have stock that appreciated in 2020, donating it to charity can significantly reduce your tax liability and eliminate capital gains on that stock. In addition, you will receive a charitable contribution for the contributed stock’s fair market value.
The last few suggestions on this list are smart charitable giving strategies that can be used any year, but the provisions and increased tax deduction amounts allowed by the CARES Act really add to the tax benefits in 2020. You’ll be able to support your favorite charitable causes while reducing your taxable income and maximizing your deductions. These are win-win concepts you will want to take advantage of before this year comes to an end.
For help with your tax planning, business planning and charitable giving strategies for the remainder of 2020 and beyond, contact Illumination Wealth. We’ll work with you to create the ideal financial plan.