We can all agree that 2020 will be a year not easily forgotten. While COVID-19 has dominated the news, there have been plenty of other notable headlines out there. Prince Harry leaving the Royal Family, Murder Hornets, cancelled Olympics, and a crashing stock market – and those are just a few of the less controversial events to make their way into our daily news cycle. Fortunately, for the stock market, there is a possibility of bouncing back to pre-pandemic levels, showing a promise of a recovering economy. However, that does not mean that there is any sort of feeling of financial certainty sweeping the country. With so many people in need, not-for-profit organizations and charities have certainly stepped up to the plate, despite being one of the most affected groups during times like these. Luckily, many individuals still have means to contribute to these groups, but even the most fortunate are looking to be smart with their money during these times. In the past, I have talked about stacking your charitable contributions in alternating years. This is still a great tool and if it is a stacking year for you (or any year if you are not stacking), there are still ways for you to increase that value that you receive from your charitable contributions.
Tax Benefits of Donating Appreciated Stocks
Donating appreciated stocks is a win-win for both you and your favorite cause. Not only will you receive a deduction for the full value of the stocks, but you also do not have to recognize any gains that have appreciated since your initial purchase. Compare this to selling the stock and donating the post-tax proceeds. Let’s say you have a group of stocks with a $10,000 fair market value and a cost basis of $5,000. If you sold the stocks, you would have a capital gain of $5,000 and pay a tax rate ranging from fifteen to thirty-three percent depending on your home state and marginal tax rate. This means you have to choose between reducing your donation by $750-$1,650, or coming up with the cash when you receive your next tax bill on April 15th. However, if you donate the appreciated securities you receive the same deduction with no additional taxes and the recipient receives the fully intended donation.
Donor Advised Funds Mean Immediate Tax Deductions
Donor Advised Funds (DAFs) are an excellent tool for charitable giving and offer many benefits. Assets donated in the current year generate an immediate tax deduction. However, the funds do not need to be distributed to a charitable organization immediately. This is a perfect tool to use alongside the stacking strategy. Let’s say it is late December and you want to stack your donations to maximize your 2020 deductions. However, you need more time to research what organizations would benefit the most from your donation. A donation to a DAF allows you to receive a deduction now and lets you decide where the money should go when you are ready by recommending a grant from your account to a qualified not-for-profit organization. Additionally, your money will continue to grow while you do your research, allowing the maximum benefit for the recipients.
Qualified Charitable Distributions Through Your IRA
If you are over 70 ½, have an IRA and donate money to charities annually, then a qualified charitable distribution is perfect for you. Unlike other strategies we have covered, Qualified Charitable Distributions (QCDs) do not need to be included in your itemized deductions. Instead, when you authorize your IRA trustee to make a distribution to a qualified organization, the deduction directly offsets your taxable IRA income. There is an annual limit of $100,000 in qualified distributions, but this is usually more than enough to cover most taxpayers annual charitable giving.
So while there might be a great deal of 2020 we’d like to forget, don’t let your charitable contributions strategy be one of them. You should consult with your CPA to what the right plan of action is for you.