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Mason City, IA 50401

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Home Blog End of Year Charitable Giving

End of Year Charitable Giving

 

November is National Gratitude month and what better way to show gratitude than through charitable giving. Research shows that people who practice gratitude every day are not only happier but also healthier. So, if you were looking for reasons to be thankful, then these benefits should be just the motivation you need. 

In 2020, despite the pandemic and economic volatility, charitable giving reached a record $471.44 billion.   

Besides all the positive health benefits of giving, what other benefits might you achieve? 

You guessed it, tax deductions! Yes, giving means receiving more benefits come tax time. For those who itemize deductions on your federal income tax return, you can generally deduct your gifts to qualified charities. This may also help potentially increase your gift. Keep in mind that the amount of your deduction may be limited to certain percentages of your adjusted gross income (AGI). For example, your deduction for gifts of cash to public charities is generally limited to 60% of your AGI for the year, and other gifts to charity are typically limited to 30% or 20% of your AGI. Charitable deductions that exceed the AGI limits may generally be carried over and deducted over the next five years, subject to the income percentage limits in those years. In 2021 the rules are even more advantageous. The limit is increased to 100% of AGI for direct cash gifts to public charities. Not an itemizer?  Not a problem.  In 2021, you can receive a $300 charitable deduction ($600 for joint returns) for direct cash gifts to public charities on top of the standard deduction.  When trying to capture the most tax benefit here are some strategies to consider: 

  • Bunching donations. Some donors may find that the total of their itemized deductions for 2021 will be slightly below the level of the standard deduction. It could be beneficial for them to combine 2021 and 2022 charitable contributions into one year (2021), itemize deductions on their 2021 tax returns, and take the standard deduction on 2022 taxes.  This strategy is referred to as “bunching”.  In 2021, these donors could also take advantage of the $300 ($600 for joint returns) deduction only available in 2021 as part of the CARES Act. 

  • Give non-cash assets.  Although it is often said that cash is king, when it comes to charitable giving it makes sense to consider giving non-cash appreciated assets. The S&P 500® index roughly doubled between 2016 and 2021. Accordingly, many portfolios have highly appreciated non-cash assets. Donating appreciated non-cash assets held more than one year often allows the donor to eliminate the capital gains tax they would otherwise incur if they sold the assets first and then donated the proceeds, potentially increasing the amount available for charity by up to 20%. This strategy can also significantly increase tax savings. 

  • Utilize retirement accounts. Donors who are in or nearing retirement might consider maximizing their charitable impact this year by utilizing retirement accounts: 

  • A Qualified Charitable Distribution (QCD) of Individual Retirement Account (IRA) assets is a great tool. Whether itemizing deductions or claiming the standard deduction, individuals age 70½ and older can direct up to $100,000 per year tax-free from their IRAs to operating charities through QCDs. This strategy can reduce the IRA balance, a reduce the donor’s taxable income in future years, lower the donor’s taxable estate, and limit the IRA beneficiaries’ tax liability.  Keep in mind, QCD requests generally should be initiated by early December to allow adequate processing time. 

  • Another strategy is to use a charitable deduction to help offset the tax liability of a retirement account withdrawal. This strategy may be used by individuals over age 59½ (to avoid an early withdrawal penalty) who will itemize deductions for 2021. As with a QCD, a withdrawal offers the benefits of potentially reducing a donor’s taxable estate and limiting tax liability for account beneficiaries. 

  • Yet another option is to consider converting retirement accounts to Roth IRAs. Individuals who itemize deductions and have tax-deferred retirement accounts, such as traditional IRAs, can use charitable deductions to help offset the tax liability on the amount converted to a Roth IRA. The primary benefits of a Roth IRA are tax-free growth, potentially tax-free withdrawals (if holding period and age requirements are met), no annual required minimum distribution, and the elimination of tax liability for beneficiaries (depending on the timing).  

As we near the end of the 2021, it is great time to review your charitable giving plans and take advantage of some of the above strategies.  Keep in mind that donors seeking a 2021 tax deduction must have their gift received and processed by December 31, 2021, and some non-cash assets require additional processing time. 

Interested in learning more about any of the above strategies? Please feel free to reach out to our team. Happy Giving! 

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