Charitable Giving Strategies: How to Make More of an Impact

Nonprofit charities, both locally and nationally, have been among the many victims of the COVID-19 pandemic. Widespread layoffs, economic uncertainty, and investment volatility have led to significant reductions in charitable giving. For those who are able, there is no better time than now to revisit your charitable giving strategies. Consider the following three tips to help maximize both the tax benefits and the impact of your charitable gift.

1. The CARES Act: An Incentive to Give for All Taxpayers

While recent tax code changes may have reduced charitable giving by dramatically raising the standard deduction, the CARES Act provides an incentive for charitable giving this year even if you don’t itemize.

Through December 31, 2020, you will be allowed to deduct $300 individually and $600 if you’re filing jointly for your cash contributions to charity. This above-the-line deduction provides a nice incentive for those who might otherwise decline to give to charity because they take the standard income tax deduction.

If you plan to itemize, the CARES Act allows you to deduct up to 100% of your adjusted gross income (AGI) for cash contributions to qualified charities in 2020. That’s up from the standard 60%.

2. Gifts of Stock, Securities, and Complex Assets

While cash to nonprofits and in-kind contributions to charities such as Goodwill make up the bulk of charitable giving, you can also donate stocks, bonds, or mutual funds and receive a significant tax advantage.

Typically, when you sell an asset that has appreciated, you pay capital gains tax. By donating it directly to a charity, you not only avoid capital gains tax but can also deduct the fair market value of the donated securities (subject to limitations). This strategy can have significant benefits for both you and your favorite charity.

Complex assets such as real estate, bitcoin, closely held corporation stock, and other restricted securities can also be gifted and represent a significant tax advantage when the basis in such assets might be close to zero.

Given the potential impact on your taxes and personal finances, you should consult with your tax or financial advisor before making gifts of stocks, securities, or complex assets.

3. Donor-Advised Funds: You Own Private Foundation

“Deduct today and give tomorrow” is one of the many benefits of establishing a donor-advised fund (DAF). Donor-advised funds provide taxpayers the benefits of making charitable contributions in cash, stock, or other securities and taking the corresponding deduction. They also offer the flexibility for you to decide when and where the charitable dollars will go.

DAFs act as your own personal private foundation, allowing you to donate as frequently as you like and to your favorite charities at any time. DAFs have grown in popularity in the past decade and now represent a significant portion of the $400 billion in annual gifts to charity.

Since the passage of the Tax Cuts and Jobs of 2017, which raised the standard deduction, a strategy known as “bunching” made DAFs even more popular. With bunching, you combine two or more years’ worth of contributions to a DAF into one year so that you can itemize on your tax return. In the years you don’t take an itemized deduction, you can use your DAF to make grants to charity on your timetable. When you are ready to itemize again, you repeat the process.

Like the gifting of stock and securities, you should consult with your tax or financial advisor to properly set up a donor-advised fund.

Talk with a Financial Advisor

To make the most of your philanthropic impact, you might benefit from talking with a financial planner. As a full-time fiduciary financial advisor in Topeka and Lawrence, Kansas, our firm helps clients plan for charitable giving as part of their overall financial planning strategies, including taxes. We generally advise that people work with a fiduciary financial advisor so that they know the advice they receive is in their best interest.

 

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Clint Patty, J.D.

As Managing Partner, Clint serves on the management team providing leadership, supporting business development efforts and providing client consultation.