The CARES Act, which took effect in 2020 as a response to the coronavirus pandemic, included some provisions that impacted charities for 2020 and 2021. As covered in a previous article, one of those changes was to allow $300/$600 deductions for gifts to qualified charities by single and joint filers, regardless of whether they were able to itemize or not. That was a nice benefit, as many taxpayers stopped itemizing under the TCJA a couple of years ago. Other changes were made to the Federal tax code which also impacted individuals who give to charity.
One of those other changes was in the limitation on how much in the way of charitable contributions made during the year could be deducted on that year's income tax return. The limitation on charitable deductions for individuals that was generally 60% of modified adjusted gross income doesn't apply to cash contributions made to public charities in 2020 or 2021 (again, this limitation is lifted for cash contributions). As a result of the CARES Act, an individual can gift as much as 100% of their modified adjusted gross income.
While it is not a change, the ability to gift a required minimum distribution (RMD) directly to a charity continues to be a great tax saving option in many cases. Specifically, an individual who has reached age 72 in calendar year 2020 (the age was 70 1/2 up to tax year 2019, when the SECURE Act increased the age for RMDs) can distribute taxable traditional and Roth IRA amounts of up to $100,000 directly to certain tax-exempt charities. In such a case, the individual donor does not recognize the income from the RMD, and does not receive a deductible charitable contribution. This can be a great way to get a benefit for a taxpayer who does not itemize and who would have given the money to charity, regardless. Without this election, such a taxpayer would have recognized taxable income from the RMD and made a nondeductible contribution. With the election, the taxpayer avoids having to report the RMD as taxable income. This may also help some of the taxpayer social security from being federally taxed as well. One of the keys is that the contribution must go directly to the qualifying charity from the IRA custodian, so a little interaction with the custodian is necessary. Further, the organization has to be a public charity, and not all charities have this designation.
Another way to make a gift is to consider using appreciated securities that have been held for the long term, particularly if an individual has enjoyed significant appreciation in a stock. The stock can be given to a charity, and the individual gets a deduction for the fair value of the stock - which effectively "gifts" away the taxpayer's capital gain. The charity pays not tax on the stock gift received, and typically turns around and immediately sells the stock.
There are multiple opportunities to maximize charitable giving, and the best strategy will often need to be fine-tuned for the specific situation.
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