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Charitable Giving: Weighing your Options

“As long as we work together, with both urgency and determination, there are no limits to what we can achieve.” - Paul Allen

The passage of the TCJA (Tax Cuts and Jobs Act) a few years ago made the topic of charitable donations an even more interesting one when it comes to tax planning. Since charitable donations are an itemized deduction and many taxpayers found themselves in a position where they would no longer be itemizing, it became even more necessary to look at every possibility when it comes to fulfilling the desire to donate while also achieving the best tax outcome. Fast forward to today and we find ourselves in another unique situation for tax planning with the passage of the CARES Act (Coronavirus Aid, Relief, and Economic Security Act).

CARES Act Changes

With the introduction of the CARES act taxpayers are now able to take an above the line deduction of $300 ($600 for married filing jointly).

For taxpayers who do itemize, the CARES Act will allow a deduction of up to 100% of your 2020 AGI (adjusted gross income). This deduction is typically limited to 60% of your AGI for cash donations.

Qualified Charitable Distributions

Individuals who are typically required to take RMD’s (Required Minimum Distributions) from retirement accounts now have the option to forgo that payment for 2020. This poses a question for those that typically use a portion of those funds to make donations through a QCD (Qualified Charitable Distribution).

Should the taxpayer forgo a distribution, or should you take the distribution to make a QCD and thereby decrease the amount of the necessary RMD in future years?

The benefit of the QCD is that the distribution of those retirement funds is not taxable since the funds have been donated. Conversely, the donation is also not deductible since taxes were not paid on the distribution. In 2020, there is a unique situation because taxpayers must decide if the benefit of taking an RMD to support your charitable giving and reducing future RMD amounts in future years outweighs the benefits of leaving the funds invested as the market continues to rebound.

While it may seem as though there is no tax benefit to using all, or a portion of your RMD to make a qualified charitable distribution, there are a few things for taxpayers to consider. When distributions are used to making donations, those distributions are not included in the taxpayers adjusted gross income. This allows the taxpayer to take advantage of other tax breaks that are tied to their AGI such as itemization of medical expenses, passive loss opportunities, and possible lower taxation of social security income.

Donor Advised Funds

Even though the CARES Act did not change how DAFs (donor advised funds) can be used for charitable giving, the change in RMD requirements does make donor advised funds a good alternative for those who want to leave their retirement funds invested. Individuals can use a DAF to move appreciated stocks from their investment accounts and deduct those appreciated amounts as a charitable donation. Additionally, these funds are not taxed for capital gains.

Donor advised funds provide taxpayers with an opportunity to make a substantial tax-deductible donation in one year and then spread the actual distribution of those funds to specific charities over multiple years. This allows taxpayers to take advantage of itemized deductions in the year they donate to the donor advised funds when they may not otherwise be able to itemize by splitting cash donations over multiple years.

Additionally, a huge benefit of DAFs is that you can donate appreciated securities and avoid paying capital gains tax on their appreciation. The taxpayer gets a tax deduction for the fair market value of the donation and also avoids the tax they would pay if they sold the security and donated cash.

With multiple opportunities available for taxpayers to support their favorite charities and reduce their taxes it has become increasingly important to know the impact of each option.

If you have questions related to your 2020 taxes and potential charitable giving options, please reach out to Hippo Tax Services so we can discuss these options in further detail and provide a more individualized analysis.

Please check with your Curran Wealth relationship manager,
or contact Curran Wealth Management if you have any questions.
 
 518.391.4200 • info@curranllc.com

The material contained in this article is for educational and informational purposes only.  The information herein is considered to be obtained from reference sources deemed reliable, but no representation or warranty is made as to its accuracy or completeness.  This article is not, and should not be regarded as “investment advice” or construed as a “recommendation” or an offer to buy or sell a security.  The information contained in this article may not apply to your personal circumstances.  Before making any decision or taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular situation.  Information on taxes is based on the tax laws existing at the time of publication.  Tax laws are subject to continual change.  In addition, tax laws vary by state.  This article is not, and should not be regarded as tax or legal advice.  We cannot ensure tax consequences of any transaction.  If you would like a detailed analysis of your tax situation, with specific tax recommendations, you can discuss the possibility of pursuing a formal relationship with Hippo Tax Services, LLC.