For those who are charitably inclined, this is a good time to look at charitable giving for 2021 to ensure that you get these contributions prior to the end of the year. Besides being a generous thing to do, charitable giving can be an integral part of your year-end tax planning.
Deadlines for 2021
In order to be able to take advantage of any tax benefits from making a charitable contribution for 2021, the contribution must be made on or before December 31, 2021. Typically, receiving credit for a contribution for the current year means that the contribution was received prior to the end of the year, not just postmarked.
There are a number of potential tax benefits depending upon each taxpayer’s situation. These can include the ability to deduct the amount of the contribution for those who can itemize their deductions. Using distributions from an IRA to make a qualified charitable distribution to a charity can reduce the tax hit for some or all of their requirement minimum distributions.
Tax-Efficient Charitable Giving Strategies
The ability to deduct charitable donations made with cash up to 100% of your adjusted gross income (AGI) enacted under the CARES Act remains in place for 2021. This means that for those who are able to do so, they give more than they might do in other years to achieve the maximum tax benefit for this year. Perhaps it makes sense to bunch contributions that you might make over several years into 2021 to take full advantage.
Note the AGI limits are lower for gifting appreciated securities and other types of donations. Unused amounts in excess of these limits can often be carried over to a subsequent year, but it is always best to consult with your tax advisor on this.
Gifting appreciated securities
With the strength in the stock market in the second half of 2020 and so far in 2021, many investors may have a number of stocks, ETFs and mutual funds in their taxable portfolios that have appreciated in value.
This strategy offers a double benefit. The market value of the securities on the date of donation will be the amount of your donation, which can be deducted for those taxpayers who can itemize.
An additional benefit comes from not having to pay any capital gains taxes on the difference between your cost basis and the appreciated value of these securities. It’s important to confirm that the charitable organization is equipped to handle these types of donations.
Qualified Charitable Distributions (QCDs)
Anyone who has a traditional IRA account and who will be age 70 ½ during the year can take up to $100,000 from their account and use this money to make a donation to a qualified charitable organization.
While there is no charitable deduction available for QCDs, the money will come out of the IRA tax-free. This can be a handy tool for those subject to RMDs who don’t need the money and who are charitably inclined. It can serve to reduce their potential tax bill. This can help those for whom the added income might increase their Medicare payments for subsequent years as well.
Donor advised funds
Donor-advised funds can be a solid vehicle for those who want to take an immediate tax deduction for a donation this year, but who want the ability to space out their contributions to one or more charitable organizations over a number of years.
DAFs are investment pools that invest the donated money. Donations must be made to qualified charitable organizations. DAFs will generally charge an asset management fee.
DAFs will generally accept gifts of cash, appreciated securities, art and collectibles and in some cases real estate.
Legislative Matters to Be Aware Of
The Accelerating Charitable Efforts Act could limit the tax benefits of donor advised funds in terms of the time allotted to make grants to charitable organizations and to the tax benefits from making donations to DAFs.
President Biden’s Build Back Better Agenda includes provisions that would increase the long-term capital gains rates for those earning in excess of $400,000. For those who are charitably inclined and who hold appreciated securities in taxable accounts, this prospect can enhance the benefits of gifting appreciated securities to charities in 2021.
Investors who are charitably inclined should get started now with their year-end giving plans to ensure that their gifts are received and reported in a timely fashion. If giving securities, you will need to allow time for the process to work.
Contact your Wedbush advisor to help you determine if any of these techniques are right for your situation in 2021.
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These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. The information in these materials may change at any time and without notice.