Tax-Smart Charitable Giving
Our clients are generous, and their charitable giving reflects their generosity. We love the opportunity to help clients reach their philanthropic goals while using tax-smart charitable giving strategies whenever possible. 2020 has presented hardships for many people and non-profits are stepping up to help. However, many charities are struggling because of fewer donations due to the economic fallout of COVID-19, in addition to having to cancel fundraising events. Thus, donations made now may be more impactful than ever. Today, we would like to share new provisions in the tax law that effect ways to engage in tax-smart charitable giving.
It is important to understand the difference between using the standard deduction or itemizing. To itemize, one must spend more than the standard deduction on qualifying expenses (subject to certain limitations) such as mortgage interest, state income or property taxes, unreimbursed medical expenses, and charitable donations. Most taxpayers use the standard deduction. For 2020, the standard deduction amounts are:
|Filing Status||Standard Deduction|
|Single; Married Filing Separately||$12,400|
|Married Filing Jointly||$24,800|
|Head of Household||$18,650|
Taxpayers 65 and older or blind can claim an additional standard deduction of $1,300 each ($1,650 if using the single or head of household filing status).
Cash donations that yield immediate tax reduction
For taxpayers under 70½, there is normally no immediate tax benefit to making charitable donations when using the standard deduction. However, new for 2020 as part of the COVID-19 response, anyone taking the standard deduction can claim an “above-the-line” deduction of up to $300 for cash donations to qualified charities. This deduction is not available to those who itemize and donations to donor advised funds and certain organizations that support charities do not qualify.
If itemizing, you can make larger charitable donations and receive a larger deduction. However, the amount you can deduct for cash contributions is generally limited to 60% of your adjusted gross income (AGI). If you donate more than that, the excess can be carried over for use on Schedule A the following year, or as far forward as is needed up to five years.
For 2020 only, the CARES Act increases this 60% limit to 100% of AGI for cash donations. (Again, donations to donor advised funds and supporting organizations do not qualify.)
The role of non-cash contributions
Earlier we wrote, “For taxpayers under 70½, there is normally no immediate tax benefit to making charitable donations when taking the standard deduction.” This is true but begs two questions, “If not immediate, when can a tax benefit be obtained and what if I am over 70½?”
Non-itemizers of any age (those using the standard deduction) can get a deferred tax benefit by donating appreciated shares of securities. The benefit is received later because such donations reduce future taxable gains. Itemizers that use this technique also reduce future gains, but they receive an immediate tax break, making this a very attractive option for them. Watch our video on donating shares to see how this works.
If you are over 70½, a tax-smart way to donate is with a Qualified Charitable Distribution (QCD). Each eligible individual IRA owner can make as many contributions from any of their IRAs to an unlimited number of qualified charities, up to a cumulative total of $100,000 per IRA owner, per year.
Usually distributions from your IRA are taxable. However, donations made as a QCD are not taxable. For years in which RMD is enforced, the donation still counts toward your Required Minimum Distributions (RMD) despite not being taxable. This is the most tax efficient way for those over 70½ to give to charity.
QCDs are most attractive to qualifying taxpayers who use the standard deduction and itemizers with deductions that are reduced by a higher gross income, such as medical expenses.
One new twist to note: if a worker takes a tax deduction for an IRA contribution when over 70½, it reduces the effectiveness of a QCD.
There are other donation methods that can be useful but donating cash, appreciated holdings, and QCDs are the most common. If donating to charity is important to you, we are happy to walk you through your options and help implement the tax-smart charitable giving method best for you. This year, those donations may be more meaningful than ever.
News & Notes
New Tampa office: Personal financial matters seem to get more and more complex every year. Uncertainty around COVID-19 makes it even more difficult to keep things in good order. As a firm uniquely equipped to help people make good decisions in such an environment, we find ourselves drawn to expanding our physical presence in Central Florida to the Tampa area. We now have an office in the SunTrust Centre on Jackson Street in downtown Tampa.
Hail to the Chief: We are happy to announce that Mike Salmon, CFP® EA has been chosen as President-Elect of the Central Florida Chapter of the Financial Planning Association (FPA). He will be the chapter president in 2021. Mike is the fourth financial planner in our firm to serve as chapter president following Dan Moisand, CFP® (1998), Ron Tamayo, CFP® EA (2001), and Charlie Fitzgerald, CFP® (2004).
Did your take home pay increase in September? Be careful Did your take home pay increase in September? If so, you may not want to spend it right away. In August, President Trump signed an executive order allowing the deferral of employee payroll taxes effective September 1. These taxes are only deferred. Unless Congress makes them permanent, the 6.2% of gross pay will need to be repaid. The deferral is a point of real controversy. Supporters like that it puts money in the hands of workers. Opponents note that since these taxes fund the Social Security system, if made permanent the payroll tax cut will cause the Social Security trust fund to deplete more quickly, possibly leading to reduced benefits.
Small increase in Social Security benefits expected in 2021: Due to the economic slowdown and the drop in prices for some goods and services, many Social Security experts initially predicted no cost of living increase (COLA) would be applied for 2021. The economic fallout from the Coronavirus shutdown has been severe but did not have the predicted effect on prices. Social Security payments are now projected to increase by 1.3%.
Please remember to call us: When anything significant happens in your life, including changes in your finances, family, or health that could affect your financial plan, please let us know so that we can adapt our planning and portfolio work for you accordingly. Also, if you ever fail to receive a monthly statement for one of the Schwab Institutional or TD Ameritrade Institutional accounts under our management, please let us know so we may assure the respective custodian delivers your statements promptly.
The Team at Moisand Fitzgerald Tamayo, LLC
Moisand Fitzgerald Tamayo, LLC is an Orlando, FL and Melbourne, FL based fee-only financial planner serving central Florida and clients across the country. Moisand Fitzgerald Tamayo, LLC specializes in providing objective financial planning, retirement planning, and investment management to help clients build, manage, grow, and protect their assets through all phases of one’s life and the many transitions in between.
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