Toward the end of the year, we enter the giving season when many of us spend time with family, reflect on our blessing, and give generously to organizations that have a special meaning to us. Charitable giving can have a meaningful impact on our communities, on our overall wellbeing, but also on our wallets. Below are some things to keep in mind as you think through your charitable giving strategy for 2021.
Universal Charitable Deduction
For those who take the standard deduction, you can claim a universal above-the-line deduction of $300 for individuals and $600 for joint fillers for any cash gifts made to qualified charitable organizations. This charitable deduction does not apply to contributions to Donor Advised Funds or to non-operating private foundations.
Charitable Deduction Limits
For those who itemize on Schedule A, there is an increased charitable deduction limit for 2021 to 100% of adjusted gross income (AGI) for cash contributions, up from the previous limit of 60% of AGI prior to the CARES Act. However, the higher limit does not apply to donations made to donor advised funds or non-operating private foundations.
Gift Securities instead of Cash
If you have highly appreciated investment securities, you could consider gifting the securities directly to charity as an alternative to making cash donations. The charity can sell the security free of any capital gains tax and you can deduct the charitable donation up to the fair market value of the securities.
Qualified Charitable Distributions (QCDs)
Once you are age 70 ½, you can make donations directly to qualified charities from your retirement account by a QCD. The QCD will avoid generating ordinary income on the distribution and can even count toward a requirement minimum distribution, if you have one. The maximum allowable amount per year that can be distributed as a QCD is $100,000 and it must transfer directly to a charitable institution. Any amount above and beyond $100,000 will not qualify for the tax benefit under the QCD provisions.
Donor Advised Funds (DAF)
If you regularly make contributions to charity and have fluctuating income, you might consider making a large contribution to a Donor Advised Fund (DAF) in a year of high income. DAFs allow you to make a tax-deductible contribution of cash or securities into a fund that is invested for growth and then you can make contributions to charity over many years. Typical DAF providers require a minimum initial contribution $5,000 although many start at $25,000 and minimum gifts to any charity could be as small as $50.
Private Charitable Foundations
For those have more to give, you might consider setting up a private charitable foundation. Private foundations come with higher administrative costs and are closely regulated as 501(c)(3) organizations. By law, foundations are required to disburse 5% of their holdings annually to charity. In addition, private foundations must make public all donations granted and investments made. However, you have complete control over how grants are made, you can hire staff – even family members – and you can leave a long term legacy.
At Hollow Brook we help each of our clients integrate charitable giving into their long term financial plan and investment strategy. While charitable giving needs may change over time, we take a long term and holistic approach to managing multi-generational assets. This management style has allowed us to maximize the impact of our client’s dollars to the charities of their choice and see the value of their contributions multiplied over generations. If you have questions about which charitable giving strategy is right for you, please reach out to us as we welcome the conversation.
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Disclaimer: Information provided is for educational purposes only. Your advisor does not provide tax, legal, compliance or accounting advice. In considering this material, you should discuss your individual circumstances with professionals in those areas before making any decisions. Further, your advisor makes no warranties with regard to such information or a result obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.