How Philanthropy Can Benefit the Nonprofits You Support and Lessen Your Tax Burden
In the aftermath of COVID-19, many individuals increased their charitable giving to support relief efforts. At the same time, new fiscal policies were put in place to address the economic downturn brought on by the pandemic. These policy changes impacted everything from retirement and tax planning to charitable giving. The Coronavirus Aid, Relief and Economic Security Act (CARES Act) gave taxpayers older than 72 the opportunity to suspend their Required Minimum Distribution (RMD) from retirement accounts for 2020. That prompted many individuals who previously satisfied their RMDs by making Qualified Charitable Distributions (QCDs) from their IRAs to consider alternative tax saving strategies to determine the most effective way to provide critically needed relief while still reducing tax responsibilities.
As we head into 2021, RMDs will once again be required. That means it is critical to take a fresh look at the role charitable giving plays in your tax planning. Below are three tax considerations to keep in mind when discussing charitable giving with your financial planner.
Cash Donations Aren’t Always King
Charitable giving doesn’t have to be synonymous with only cash donations, and the strategy you pursue can significantly impact your tax responsibility. Taxpayers who have held highly appreciated stocks for more than a year in non-retirement accounts can donate these long-term appreciated securities to charities and receive a double tax benefit. Taxpayers who itemize can receive a charitable deduction on Schedule A for the fair market value of the security gifted and avoid paying capital gains tax on the income.
When planning your philanthropic donations with your financial advisor, think outside the box and consider your full portfolio of assets. There may be a way to support causes you are passionate about and reduce your taxes in return.
A Donor-Advised Fund can be a Win-win for Philanthropy and Tax Savings
One of the most popular tax saving strategies is also one of the best ways to maximize your philanthropic impact. Donor-Advised Funds (DAFs) allow charitably inclined taxpayers to give strategically by investing and growing assets that can be donated to any 501(c)(3) in good standing with the IRS at any time.
Taxpayers with DAFs are able to take a charitable giving tax deduction at the time of contribution of cash, securities or other complex assets. Beyond the ability to grow the account to increase the amount that can be given, DAFs are a proven, flexible giving vehicle that allow donors to support charities by contributing assets other than cash that, in many cases, a charity would not be able to directly accept and liquidate to support their missions.
Qualified Charitable Deductions May Again be a Good Option
Prior to the Tax Cuts and Jobs Act of 2017 (TCJA), one of the smartest charitable giving strategies was donating appreciated assets. However, the TCJA increased the standard deduction for taxpayers and eliminated or capped many popular itemized deductions. These changes significantly increased the value of QCDs. Because QCDs are not counted towards adjusted gross income (AGI), they provide several tax benefits while also being able to support charities.
With RMDs restored for 2021, if you are required to pull from your IRA, you can use that money (up to $100,000 annually) to support charities of your choice and realize tax savings. To qualify for a QCD, contributions must be made directly from an IRA to the charity and cannot be donated to DAFs, private foundations or other grant-making institutions.
Your Partner in Tax Planning and Philanthropy
Navigating taxes and your philanthropic plan are personal. And it can be very complicated. To help, the Wescott Tax Alpha Group developed the 2021 Tax Strategy Guide to provide insight and guidance from our top Philadelphia financial advisors to help our clients understand complex tax topics, including how to make the most of their philanthropic efforts.
As we move forward in 2021 still reeling from a global pandemic and anticipating potential fiscal policy changes, we invite you to meet with our advisors today to make your plan for tomorrow. As fiduciary financial advisors, we are fee-only counselors who are committed to working in your best interest and can help you plan and implement your philanthropic legacy, while simultaneously helping you determine how you can save money on taxes.
We take seriously our role in helping clients make fiscally sound decisions, and we’re honored to have recently been named a Barron’s Top Advisor.
Download our free tax strategy guide for tips.
