Charitable giving is more essential than ever. Amid the global pandemic, charitable organizations have been stretched thin and are lacking funds to better serve their communities. While charitable giving had been on the rise – nearly $428 billion in 2018 – market volatility and economic instability could leave many people unable to give in ways they’ve been able to in the past. And yet, even in a turbulent year, there are still several ways to maximize your charitable donations. Let’s explore how to maximize your charitable gifts this year.
Donations in a Pandemic
COVID-19 has impacted nearly every facet of life. In the blink of an eye, people work remotely, small businesses fight to stay open, and record unemployment sweeps the nation. Parents become teachers, hospitals are overwhelmed, and the economy tinkers on the edge of a cliff.
Many charitable organizations worry financial instability will lead to a decline in giving, but some early studies have held out hope. A study by Fidelity Charitable in March 2020 found 54% of donors plan to maintain their current giving levels while 25% even plan to increase their donations.
While it might be surprising, philanthropy has increased during the pandemic. Fidelity Charitable also reported an 18% increase in grants totaling $2.5 billion, with $236 million reserved for COVID-19 support.
Charitable giving plays a crucial role in many people’s lives. In addition to philanthropic efforts, the CARES Act instituted provisions to catalyze charitable donations. Let’s take a closer look.
How the CARES Act Changed Charitable Giving
The CARES Act brought people and businesses important economic relief in light of COVID-19. From stimulus checks to government loans, the bill aimed to bring financial support to many across the country.
While cash relief took center stage, the provisions related to charitable giving have flown under the radar. Starting in 2020, those who elect for the standard deduction on their taxes can take a modest above-the-line charitable deduction of up to $300, allowing families who can’t itemize to receive a small tax benefit from charitable contributions. If you take advantage of this deduction, be sure to get a receipt for the transaction; the IRS requires it.
This provision excludes gifting property and donor-advised funds, making cash gifts the most viable option. The above-the-line deduction only applies to people who take the standard deduction, so those who itemize won’t be able to deduct the extra $300.
The universal deduction will likely impact many families as changes in the Tax Cuts and Jobs Act (TCJA) made itemizing more difficult. Even though the amount is lower, it opens the door for universal deductions, something charities and nonprofits have wanted for years.
The CARES Act also adjusted the deduction gap, which benefits large donors. For those who can itemize deductions, the current gap is 60% of their adjusted gross income. For corporations, that gap is 10%.
The new provision has increased it to 100% for individuals and families, and 25% for corporations. This stipulation opens up the possibility for large donations in 2020, something many organizations and the people they serve need.
Understanding the Standard Deduction
We’ve referenced the standard deduction a few times already. What is it and how does it impact your charitable contributions?
The Tax Cuts and Jobs Act made headlines when it took effect in 2018, namely for its boost in the Standard Deduction. With numbers nearly doubling from prior years, many individuals and families needed to re-think their deduction strategy. This mindset still prevails today.
The Standard Deduction limits for 2020 are:
- Single, $12,400
- Married filing jointly, $24,800
- Head of Household, $18,650
With these sky-high deductions, people must donate significantly more money to charity before being able to write it off on their taxes. While some can simply increase their gifts, others need to employ strategic measures to maximize their charitable giving while still reaping tax rewards. Here are a few ways you can make the most of your donations.
Bundling Charitable Donations
People who bundle their donations take advantage of itemizing one year and taking the standard deduction in another. In essence, you bundle your charitable donations into a shorter time frame for tax benefits. For example:
Andre and Jasmine are married and file jointly. They are passionate about giving back to their community and normally donate $20,000 to various charities and organizations each year. With the standard deduction at $24,800, they wouldn’t be able to itemize their charitable gifts.
Instead of increasing their annual donations by nearly $5,000, they could bundle their donations and give $40,000 in one year – condensing two years’ worth of donations into one. In the second year, they would simply take the standard deduction. This way, the charity still receives the same amount of money and the couple can itemize.
Using a bundle strategy over two years, Andre and Jasmine would deduct $64,800 instead of $49,600, saving them a significant amount of money.
Open a Donor-Advised Fund (DAF)
A DAF is a flexible and efficient avenue for charitable donations. You fund the account with assets like cash, stocks, mutual funds, and real estate, then elect when and where the money goes.
Your contributions are tax-deductible and all gains grow tax-free. When given to a qualifying charity, you don’t have to pay any taxes on the donations. DAFs are tax-efficient for you and increase the gift you can give to the organizations of your choice.
The account is managed by a third party and you make recommendations to the charities you wish to fund. This means you can support multiple charities through one vehicle and choose when you want to donate.
Most accounts can be opened with just a $5,000 initial contribution. Your contributions are tax-deductible the moment you fund them (not when you initiate the grant to the charities from the account), making them highly tax-efficient.
DAFs allow you to give more to the causes you care about most while being an exceptional way to incorporate charitable giving throughout the year. The month of December alone represents 20% of all charitable donations.
While year-end giving is a wonderful tradition, giving monthly or quarterly can be an effective way to donate throughout the year. This practice makes donating a fundamental part of your financial life.
Gift With a Qualified Charitable Distribution (QCD)
QCDs offer retirees who have an IRA a tax-efficient way to donate to charities. With this process, you can donate all or a portion of your required minimum distribution (RMD) from your IRA to one or more qualified charitable organizations (up to $100,000).
Donating RMDs saves on taxes while amplifying your gift. Normally, retirees must begin taking RMDs when they turn 72 (70 ½ for those who reached that age in 2019), but the CARES act suspended RMDs for 2020. This provision means people don’t need to take RMDs until 2021.
The rule is beneficial for those who don’t need to take withdrawals and can give their accounts time to bounce back from mid-year volatility, but it could impact the number of people who take advantage of QCDs in 2020.
Still, if you don’t need all the income from your IRA, you should consider giving through this avenue. Call your IRA custodian to initiate the transfer. (It’s important to note the only way you can successfully use this strategy is if the transfer is made directly from your IRA custodian to the charity of your choice.)
Give With Intention
Giving comes in many different ways. While financial support is always welcome, you can also use your time, energy, and talents to help organizations and causes you care most about. What does this look like?
- Serving on boards
- Getting involved in community service
When you give with your heart, you bring intention, value, and meaning to the experience. This is an incredible way to live out your values, give back to your community, and inspire others around you.
The gift of your time can be just as rewarding and critical as donating money or other resources. Find new ways you can give back this year.
What Can You Donate to Charity?
This may sound like a straightforward question, but strategically giving to charities goes beyond cash. Examples are:
- Appreciated assets like stock, mutual funds, real estate, etc.
- Valuable items like a car, furniture, or clothing
- Your time
The strategies we’ve shared here require you to donate to a qualified charitable organization. What does this mean, and how do you know what to look for? A qualified charitable organization is tax-exempt and donations can be tax-deductible. The IRS labels these organizations as 501(c)(3), which means they aren’t for-profit.
This tax treatment restricts them from funding a private shareholder, engaging in political campaign activity, or promoting private interests. Wavering from these rules could revoke their status.
It’s essential to donate to a qualified charitable organization to take advantage of the tax benefits associated with them.
Are you ready to expand and revitalize your charitable contributions this year? Give us a call today. We love helping people align their money with their values, and can help you do the same.