In the post-holiday rush to return gifts and plan for New Year’s celebrations, please take one more minute to reconsider your holiday charitable giving. You have a few more days to make a big difference before the end of the year.
The changes in the tax law made in 2018 increased the standard deduction and limited deductions for state and local taxes. As a result, nearly nine in 10 people have decided not to itemize deductions and instead use the standard deduction.
When the changes were made, charities hoped they would not be overlooked without those itemized tax deductions. But Americans are still the most charitable people on the planet. Last year, in the midst of the pandemic, unemployment, health care concerns and political chaos — and despite tax law changes — Americans gave a record $471 billion to charities in 2020, according to Giving USA. This was a 5.1% increase in total giving over 2019.
And, there are still tax benefits you can use if you make a 2021 contribution right now:
CARES Act $300/$600 2021 charitable deduction
The CARES Act of 2020 originally created a special deduction for charitable contributions even if filers use the standard deduction. For 2021 that deductible amount has been increased to $300 on a 2020 individual return and $600 on a joint return for charitable deductions in addition to the standard deduction. That deduction has been extended to 2021 returns, which you will start filing next February. But the contribution must be made before year-end, in just a few days.
Contributions can be made by check, credit card or debit card, but don’t include the value of volunteer services, household items or other property. Keep good records of your canceled check or card receipt, and any acknowledgment from the charity. The gift must be made to a legitimate tax-exempt charity.
There are literally thousands of organizations that could use your help. Find them at CharityNavigator.org, where you can check out charity ratings (how much of their fundraising goes to overhead vs. direct support of the cause). And if you don’t have a cause in mind, scroll through the list. All charities listed on this site will qualify for your tax deduction.
Charitable gift from your IRA
As those over 72 know, there’s a required minimum distribution (RMD) that must be taken before year-end. That RMD is considered ordinary income for tax purposes. But there is one helpful exception for people who don’t need the distribution for their living expenses.
If you are at least 70 1/2 years of age, you can donate an IRA distribution of up to $100,000 to a qualified charitable organization and the distributed amount is excluded from your gross income for federal income tax purposes. And that contribution counts toward your RMD for that tax year. So you get the joy of giving and don’t have to pay taxes on that portion of your distribution.
But you must follow some important procedures:
— The donation must be made to a registered 501(c) 3 charity.
— Your IRA custodian must make that transfer directly from your IRA to the charity. (Don’t take a distribution and then write your own check.)
— You must have a letter of acknowledgment from the charity.
Donor advised funds
Every year, I write about donor-advised funds, calling them an easy way to establish your own “charitable foundation” without all the paperwork. Sponsored by financial institutions like Fidelity, Vanguard and others (and sometimes called “charitable gift funds”), they allow you to open a special mutual fund account with one tax-deductible deposit. Then the money can grow invested inside the fund over the years, as you make future distributions to recognized charities of your choice.
There’s an added advantage to that strategy in 2021 for large contributions. Congress increased the adjusted gross income limit for cash contributions to qualifying public charities for the 2020 and 2021 tax years. The deduction limits are now 100 percent of adjusted gross income (up from 60 percent of adjusted gross income prior to the CARES Act). This would be a good time to deposit a large lump sum into a charitable gift fund, benefit from the immediate deduction, and spread the giving over future years.
Special note: You cannot make a gift transfer from an IRA to a donor-advised charitable gift fund.
All of this charitable giving must be completed before year-end, and it would be a shame to let this opportunity slip by. That’s the Savage Truth.
(Terry Savage is a registered investment adviser and the author of four best-selling books, including “The Savage Truth on Money.” Terry responds to questions on her blog at TerrySavage.com.)