With less than two months left in the year, now is a great time to consider how your charitable contributions may impact your 2021 taxes. The Consolidated Appropriations Act, 2021 expanded charitable contribution incentives enacted by the CARES Act and offers benefits whether you itemize deductions or not.
Cash Donations:
Those who don’t itemize can deduct cash of up to $300 for individual filers, or $600 for joint filers, of qualified charitable contributions for 2021. Cash contributions to most charitable organizations qualify. However, cash contributions made to supporting organizations do not qualify.
For those who itemize deductions, the CAA extends the 100% of Adjusted Gross Income (AGI) limit for qualified charitable contributions. This is a big benefit as these deductions are normally limited to 60% of AGI. Qualified contributions are those made in cash to qualifying charitable organizations.
IRA’s:
Throughout the year, we encouraged clients to evaluate the wisdom of Roth IRA conversions. In doing so, funds in a tax-deferred traditional IRA are converted to a tax-free Roth IRA. However, to do so one must pay income taxes on funds not previously taxed.
Currently, tax rates are some of the lowest ever. Furthermore, it appears there is a high possibility tax rates will be higher in the near future. Given this combination, many are evaluating Roth conversions to lock-in lower tax rates today in exchange for avoiding higher rates in the future.
Although the allure of compounding tax-free is quite enticing in the Roth, many people have hesitation given the tax bill due on converted amounts.
The 100% AGI deduction for charitable contributions provides a great opportunity to convert a traditional IRA to a Roth IRA. As such, the taxpayer can offset the increased income realized from the conversion with the qualified contribution deduction. In the process, you can help society and lower future tax bills.
Additionally, individuals with traditional IRA’s can take distributions in 2021 and offset the associated tax bill by making a qualified contribution with the cash proceeds.
For those with Required Minimum Distributions (RMD) from an IRA, individuals can make a Qualified Charitable Distribution (QCD) on up to $100,000 of the required distribution. To ensure this happens flawlessly, let your IRA custodian know your intent. The money must be sent directly from the IRA, by the custodian, to the charity.
Facilitating the QCD puts 100% of the money in the hands of the charity and the individual is not taxed on the IRA distribution. This works particularly well for individuals who don’t itemize deductions.
Appreciated Securities:
Given the strength in the stock market the last few years, consider donating appreciated securities to your favorite charity.
If a security has been held at least a year, a taxpayer making a charitable contribution using appreciated securities receives a tax deduction for the full fair market value of the security and does not pay income tax on built-in appreciation.
The deduction for contributing appreciated securities is limited to 30% of AGI. For donations of appreciated securities made to a private foundation, the donation is limited to 20% of your AGI. If your donation exceeds the AGI limits, the excess charitable deduction can be carried forward up to five years.
Donor Advised Fund:
A Donor Advised Fund (DAF) is a fund sponsored by a public charity allowing donors to make an often sizable contribution to the DAF, receive a current year tax deduction for the contribution, and then recommend grants from the DAF to favorite charities over time.
DAFs are especially useful in a year in which a person has unexpectedly high earnings and even more so when that income is considered ordinary and is taxed in the highest tax brackets.
Time Is Of The Essence:
The year will be over quickly and many are attempting end-of-year planning. As such, financial firms have cautioned that requests will be filled on a “best efforts” basis. This is their way of saying that if you wait until the last moment, maybe it will get done and maybe not.
The time to implement any of these strategies is now.
Dave Sather is a Certified Financial Planner™ and CEO of Sather Financial Group, a fee-only investment management and strategic planning firm.