Barbara O’Neill, Ph.D., CFP®
Distinguished Professor and Extension Financial Management Specialist Emeritus
Rutgers Cooperative Extension
As the pandemic continues after one full year, many people are hurting financially. Examples of traumatic impacts include loss of income, food insecurity, and depletion of emergency savings. On the other side of the spectrum are Americans who have been doing as well as or even better than before throughout the pandemic and whose finances are barely affected. Some may be looking for tax-advantaged strategies to reduce their income taxes. Others may want to help others who are less fortunate than they are.
The good news is there are seven tax-smart strategies to do both; i.e., reduce income taxes and make tax-advantaged donations to help charitable organizations that are helping Americans survive the pandemic. Below is a brief description of each tax-advantaged strategy and action steps that people can take to use them:
- Tax Deduction for Non-Itemizing Taxpayers - As a result of the Omnibus Spending and Coronavirus Relief Law passed in December 2020, there is an income tax deduction for donors who do not benefit from itemizing deductions in 2021. Single taxpayers can deduct $300 and married couples filing jointly can deduct $600. This tax write-off applies to cash contributions only, not to donations of property.
- "Bunching Up" Tax Deductions - Unless they have large medical expenses or qualified catastrophic losses, the 10% or so of taxpayers who itemize deductions typically have some type of planning strategy. One is "bunching," i.e. paying several years of tax-deductible expenses in one tax year. Often, this involves "voluntary" tax deductions such as elective medical procedures and charitable gifts. Typically, people "bunch up" deductions in years where they expect to have an above-average income.
- Qualified Charitable Contributions (QCD) - With QCDs, taxpayers aged 70 ½ and over donate the required minimum distribution (RMD) from their traditional IRA to a qualified charity. The QCD counts toward their RMD withdrawal. The distribution is made directly from the IRA custodian (e.g., a bank or mutual fund company) to the charity. The maximum annual exclusion for QCDs is $100,000 or $200,000 for married couples filing jointly. Funds must be withdrawn by December 31 of the tax year.
- Donating Appreciated Securities - Assets that can be donated include stocks, bonds, exchange-traded funds (ETFs), real estate investment trusts (REITs), and even bitcoins. Donors are able to give (and charities able to receive) more than if the securities were sold, capital gains taxes were paid, and the remainder was donated. Donors avoid capital gains taxes and can deduct the fair market value of the assets that were donated. This strategy can also help donors rebalance their investment portfolio assets.
- Donor-Advised Funds (DAFs) - DAFs are a tax-deductible irrevocable gift for charitable purposes. First, donors select a custodian (e.g., Fidelity, Schwab, Vanguard, TIAA) by comparing investment options, procedures, and expenses. Next, they contribute cash, investments, or appreciated assets to open a DAF account. Then they set up an asset allocation strategy and invest in one or more asset "pools" (e.g., stocks, fixed income securities, and cash assets). Lastly, donors recommend grants to charities at any time. The custodian makes sure the charity is tax-qualified and sends them the donation.
- Charitable Trusts - Charitable trusts require the assistance of an attorney. Donor assets used to fund the trust are retitled in the trust's name. Ongoing administrative management expenses are involved. The tax deduction for the donor is based on the value of the projected income stream to the charity. Two common types of charitable trusts are charitable lead trusts and charitable remainder trusts.
- Private Foundations - Some donors elect to become their own charitable organization by setting up a private foundation (PDF). There are strict regulations and tax laws such as the requirement to file an annual Form 990. Private foundations often involve ongoing hands-on donor involvement and provide a high degree of donor control over charitable gifting. Mandatory minimum distribution rules apply.
To learn more about tax-advantaged gifts, review the Charity Navigator webpage, Tax Benefits of Giving.