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Tax-Smart Strategies to Help Those in Need

November 2020

Barbara O’Neill, Ph.D., CFP®
Distinguished Professor and Extension Financial Management Specialist Emeritus
Rutgers Cooperative Extension

As described in a recent webinar by Rutgers Cooperative Extension, there are two financial faces to the COVID-19 pandemic: people who are struggling with job losses, overdue bills, and/or increased expenses and those who are basically “financially unscathed” with continued income, reduced expenses (e.g., no commuting, childcare, and/or travel), and/or no investment losses (unless they panic and sell securities in a down market).

Toward the end of each year, interest in tax-advantaged philanthropy to help those in need often increases. There is some evidence that donors plan to give more this year in response to COVID-19 and social justice issues. Many charitable organizations are in desperate need of funds after 2020 fund-raising events were cancelled.

A key point to remember is that how you give and what you give is as important, perhaps even more so, as the dollar amount involved. With a 2020 standard deduction of $12,400 for singles ($13,700 at age 65+) and $24,800 for married couples filing jointly ($27,400 if both spouses are age 65+), it is much harder for those who write checks to support charities to see a direct tax benefit as the standard deduction saves more in taxes than itemizing.

 Below are three strategies to help those in need and also receive a tax benefit for your charitable contributions:

  • Establish a Donor-Advised Fund (DAF): I did this personally this year and it was super easy. First, you select a DAF custodian such as Schwab, Vanguard, Fidelity, or TIAA by reviewing their portfolio investment options and expenses. Next, select an asset allocation for your deposit and make a tax-deductible contribution.

    Typically, you’ll want to contribute more than your standard deduction amount to gain the ability to itemize deductions, including the DAF deposit. This is often referred to as a “bunching” strategy where people plan to be able to itemize every few years or so.  Lastly, follow the custodian’s procedures to make grants to charities from your account at any time. The custodian makes sure the charity is tax-qualified and sends out a check.
  • Donate Appreciated Securities: Consider gifting appreciated securities to charities instead of cash. For example, bonds or stock or mutual fund shares. Securities can be transferred directly to charities who accept them or placed within a DAF for greater flexibility as to the timing and recipients of charitable gifts.

    Donors can claim the fair market value of the gift on their income tax return and avoid paying capital gains tax on the gifted amount. This can save a considerable amount of taxes if securities were held a long time and grew significantly. Charities also receive more than if donors sold shares and donated the after-tax proceeds.
  • Qualified Charitable Contributions: Starting at age 70 ½, donors with traditional IRAs can donate up to $100,000 to qualified charitable organizations directly from their IRA(s). This is called a qualified charitable distribution (QCD). Withdrawals for charitable donations are not counted as taxable income and can be used to comply with required minimum distribution (RMD) tax rules for traditional IRAs that begin at age 72.

    Charitable contributions must be sent directly from an IRA account custodian to a qualified charity in order to qualify for a QCD. Account owners cannot take possession of the money. All IRA distributions are reported to IRA account owners and the IRS on Form 1099-R and QCDs should not be included in taxable income.

There is one more way to give to qualified charities and save on income taxes for tax years beginning in 2020. There is a $300 deduction allowed for non-itemizers as a result of the CARES Act. This is often referred to as an “above the line” deduction because it is an adjustment made before determining adjusted gross income (AGI).

To summarize, it is still possible to receive tax benefits for charitable donations. Donating to charities is a win-win-win for all involved. Donors reduce their income taxes, charities receive desperately needed income, and clients of charities receive much needed support. There is still time to make arrangements for any of the strategies listed above. Every small step that people take to help others this holiday season will make a difference.