In 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provided crucial incentives that encouraged individuals to give to charitable organizations during a time of unprecedented hardship. Today, with the need just as high, the government has extended these charitable giving provisions through December 31, 2021.
Below are some examples of giving strategies to accelerate your tax-advantaged philanthropy in 2021 at The Community Foundation. As we do not provide tax advice, we recommend discussing these options with your tax advisor or financial planner as they may not apply in your situation.
1. Deduct $300 (individuals) or $600 (joint filers) without itemizing
This year only, the CARES Act allows for individuals to deduct $300 and joint filers to deduct $600 of charitable gifts without itemizing. To qualify for this above-the-line deduction, your contribution must be a cash gift to any operating nonprofit organization like the Community Foundation. Gifts to private foundations and donor-advised funds are not eligible.
To view a list of all Community Foundation funds that qualify—including the Community Fund and the recently established Racial Equity and Social Justice Fund—please visit foundationhoc.org/give/funds and navigate using the menu at the top of the list.
2. Deduct up to 100% of your income
This year only, the CARES Act allows you to deduct up to 100% of your adjusted gross income (AGI) using charitable gifts of cash (increased from the former 60% prior to the CARES Act). As with the $300/$600 deduction from above, gifts to any fund at the Community Foundation qualify, except for donor advised funds. Visit foundationhoc.org/give/funds to see a complete list.
3. Bunch gifts with a donor-advised fund
The 2018 tax law created much higher standard deductions. Fewer people can use charitable deductions because they aren’t itemizing. One way around that is to “bunch” charitable gifts using a donor-advised fund at the Community Foundation.
Example: A donor puts 5 years’ worth of donations into a donor-advised fund (consider gifting appreciated assets to amplify your tax benefits as described in #4). The donor takes a tax deduction for the entire amount in that year. Because the deduction is so large, the donor itemizes in that year. In later years, the donor makes their grants to charities from the fund. This creates no tax deduction, but in those years the donor takes the standard deduction instead of itemizing.
4. Make a charitable swap: Give appreciated investments WITHOUT changing your portfolio
Donating appreciated assets to the Community Foundation creates two tax benefits. The tax deduction is the same size as a gift of cash (the asset must have been owned for a year or more). Plus, you avoid paying capital gains tax.
With a charitable swap, you donate old shares of stock and immediately purchase new shares in the same company. This does not change your portfolio, but the capital gain is removed. Because this is gain property not loss property, there is no waiting period.
5. Make IRA gifts @ age 70½ +
Those age 70½ or older can make gifts directly from an IRA through a qualified charitable distribution (QCD) to the Community Foundation up to $100,000. This gift donates pre-tax dollars. A QCD can satisfy your required minimum distribution (RMD) for the year and reduce your income taxes. The earned income is never taxed because it goes directly to a qualified nonprofit organization.
6. IRA beneficiary vs. gift in a will
Many people like to include a charitable gift in their will to the Community Foundation to support a cause that has been important in their lives. One tax smart strategy is to leave part of an IRA, 401(k), or 403(b) account as your legacy gift. This is smart because heirs pay income taxes on this money. Starting this year, heirs (except spouses) must take out all funds and pay taxes within 10 years of inheriting. Any part left to a nonprofit avoids these taxes, so it is best to use these accounts first when considering a legacy gift to the Community Foundation.
7. Move your 401k/403b into an IRA rollover now to prepare for future IRA gifts
RMDs have returned in 2021 for those age 72+. A qualified charitable distribution from your IRA or IRA rollover reduces RMD. It’s a great way to give!
To do this with a 401(k) or 403(b), you must first convert the account into an IRA rollover. This conversion requires first taking any RMD from the 401(k) or 403(b). You must pay taxes on that distribution. After the conversion, you’ll be set up to make future donations from your IRA rollover whenever you want.
8. Combine a Roth conversion with a donation
A Roth conversion moves money from a standard IRA into a Roth IRA. The benefit: all distributions from the Roth IRA are tax free (even distributions of future growth are tax free). The downside: the money moved into the Roth IRA counts as immediate income.
However, this year only, up to 100% of income can be offset by charitable deductions. This includes income created by a Roth conversion. If you already have a multi-year charitable plan or pledge, donating it all this year and combining with a Roth conversion might make sense.
To learn more about how your gifts can make a lasting impact at the Community Foundation, contact: Nick Grimmer, CFRE, (315) 525-6584, firstname.lastname@example.org.
This article includes insight from Russell James, J.D., Ph.D., CFP, Professor of Charitable Financial Planning at Texas Tech University. It was edited for content and republished with permission.