It's November, and many of us are getting into the holiday spirit. It's also a popular season for charitable giving. Whatever drives you to donate to your favorite charities, it's good to understand your options for giving and how your gifting plan might also help reduce your tax bill in April.
First things First
Gifts to qualified charities can be deducted from income if you itemize deductible expenses on Schedule A. The amount of the gift that you can deduct depends on the type of donation (cash/check, securities, collectibles, etc.) and the charitable organization or vehicle.
To itemize, total deductions must exceed the standard deduction amount that the IRS allows for those who don't have significant expenses to itemize.
- The 2021 standard deduction for single tax filers is $12,550, married filing joint is $25,100, and head of household is $18,800.
- If you are age 65+, you can deduct an additional $1,700 for singles and $1,350 each for joint tax filers.
- Your gift to charity, along with other deductions on Schedule A, such as taxes, mortgage interest, and medical expenses, must exceed the standard deduction amount if you intend to enhance your deductions from income.
If you use the standard deduction in 2021, you can deduct up to $300 of cash gifts to charity from income if you file single, or up to $600 if you file jointly. This above-the-line deduction is an extension of the CARES Act enacted into law last year and is intended to be temporary.
Deductibility
The amount of your charitable deduction may be limited depending on the type of gift, the amount, or the strategy. The following giving tactics have different deductibility limits and are subject to change each year. If you can't deduct the full amount in one year, the unused portion can be rolled forward and used for up to 5 years on future tax filings.
Simple Gifting Strategies/Vehicles
Cash/Check: For the tax year 2021, 100% of your cash donation is deductible, up to the amount of your adjusted gross income (AGI), if you itemize. (Temporarily increased from 60% under the CARES Act.)
Appreciated securities: Making charitable gifts of investment holdings (stocks, mutual funds, etc.) that have appreciated in value since purchase is a great gifting strategy. If you have held the security for 12 months+, the gift's full market value is deductible up to 30% of your AGI. You get a charitable tax deduction and you avoid any capital gains tax on the appreciation. Since a charity is not subject to income tax, it does not owe capital gains tax either when the investment is sold.
Qualified Charitable Donation (QCD): Once you attain age 70.5, you can donate up to $100,000 to charity directly from your IRA via a QCD. The gift must transfer directly from the IRA to the charitable organization in order to meet the QCD requirements. The amount of your gift is not deductible for tax purposes, but the direct distribution to the charity is not included on your tax return as a taxable IRA distribution either. And, if you're at the age where you have to take required minimum distributions (RMDs), this charitable gift counts toward the RMD!
Tangibles, such as art and collectibles: These items can be used for gifting to charitable organizations or donor-advised funds (DAFs), subject to valuation and deductibility limitations.
Donor-Advised Fund: A DAF is essentially an investment account earmarked for charitable gifting. Contributions to the account are treated as a gift to a qualified 501(c)(3) charity and tax-deductible as such. DAFs can be established with many large financial institutions, such as Vanguard or Schwab, and community foundations. They can be funded with cash, securities, or tangibles and offer the opportunity to front-load your charitable gifting in one year with disbursement to charities in future years. (Unfortunately, you cannot donate to your DAF via a QCD.)
Scholarship Granting Organization: A SGO is a non-profit organization established to provide educational opportunities to underprivileged students. They also allow schools to implement policies for improving access to a good education for all, regardless of economic background. In addition, gifts to SGOs offer significant tax benefits via state tax credits for the donor.
Read More: Want Triple Tax Benefits? Donate to Scholarship-Granting Organizations
Summary
Whether you gift your time, drop cash in the Salvation Army bucket, or make larger donations to charity via appreciated securities, every ounce of your giving helps fund a greater cause. Knowing that your gift supports our community is a gift to yourself. Enjoy the season, and remember, the charity must receive your generous gift by December 31 if you're looking to realize a tax benefit in April.
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