Charitable Gifting Strategies

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While we have moved forward into a new year, many of the challenges we faced in 2020 and 2021 are still with us. Many families continue to struggle to find work. They have come to rely on the services provided by their communities.

There are several strategies that you can employ that will ensure that your dollars are directed to a cause you care passionately about while providing you with potential tax savings. Before embarking on any of these strategies, please consult your accountant and your financial advisor.

Gifting securities is particularly appealing for those who have large capital gains

While writing a check is the most popular way to donate to the Jewish Federation of Raleigh, did you know that you can also gift securities such as stocks, bonds, or mutual funds? This may be particularly appealing to those individuals who itemize their deductions.

Deductions for appreciated securities are limited to up to 30% of adjusted gross income (AGI) in the year of the donation when gifted to a qualified public charity, with a five-year carry-forward for unused deductions.

This strategy is most beneficial when gifting assets that have appreciated in value and have been held for one year or longer. Why? For gifts of long-term capital gain property, the donor can generally claim a federal income tax charitable deduction for the fair market value of the property as compared to short-term capital gain property, where the value of the federal income tax charitable deduction is limited to the cost basis.

Do not sell the security and then gift the proceeds; you will be liable for the capital gains tax.

Qualified Charitable Distributions (QCD) are an option for those 70 ½ or older

If you are over the age of 70 ½, consider using your IRA as a source of funding your charitable donations to the Jewish Federation of Raleigh. By making a donation directly from your IRA, you avoid paying taxes on the distribution. This can be particularly appealing if you are at the age where you must take your required minimum distribution (RMD) but financially you do not need to do so.

QCDs are limited to $100,000 per person, per year. For a married couple where each spouse has their own IRA, each spouse can contribute up to $100,000 from their own account.

Donor-Advised Funds (DAF) allow young families to create a plan for philanthropy

Many people wrongly believe that making charitable donations is only for established wealthy families. A DAF is an easy and affordable way for young families who want to make a difference throughout their life create a plan for philanthropy.

A DAF is a special account whereby an individual makes a contribution to the DAF and received an immediate charitable tax reduction (subject to IRS restrictions). The monies in the account grow tax-free. These accounts are offered by major fund companies, as well as community foundations, universities, and individual charities. Before opening an account inquire about fees, minimum balances, investment choices, and grant restrictions (how often are you required to make a grant, causes you must grant to, etc.).

Donors do not have to specify which causes they want to contribute to in advance. Jewish Federation of Raleigh can accept grants from a DAF.

The Coronavirus Aid, Relief, and Economic Security Act (CARES) provides increased incentives to encourage greater donations than in previous years

The Cares Act provides an opportunity for individuals and families to take deductions for certain donations on their taxes next year. Retirees who do a Roth IRA conversion are in line to see a particularly generous benefit.

Individuals who itemize may now deduct up to 100% of their gross income for cash (or check) donations to public charities; this is a 60% deduction increase. This increased deduction ceiling applies only to public charities, not to private foundations, “supporting organizations,” or donor-advised funds.  The lower 30% limits continue to apply to gifts to those organizations.

In 2020, individual taxpayers who do not itemize may claim a deduction, from their gross income, for up to $300 in cash donations to public charities in addition to their standard deduction.  There are several differences in the regulations for 2021 vs. 2020.

  • For 2021, families who file jointly may claim a $600 deduction. This option was not available in 2020.
  • For 2021, the $300 or $600 amount is an add-on to a non-itemizer’s standard deduction. In 2020, the contribution was a direct deduction from Adjusted Gross Income (AGI). In 2021, the deduction will be taken after the AGI is figured. This distinction matters because many credits and other tax benefits are limited by the AGI amount. 

The CARES act also removed the required minimum distribution (RMD) requirement for 2020. The RMD has been reinstated for 2021.

For these reasons, converting a portion of your traditional IRA retirement account to a ROTH IRA while making a charitable donation can provide you or your beneficiaries tax-free income, allow you to make a contribution to the charity of your choice, and reduce your tax burden by the amount of your donation.

Michael Lewis CFA, MBA

Tutor Financial Advisors | 2601 Weston Parkway Suite 101 Cary, NC   27513 | 919-629-0178 | Michael@tutorfinancial.com | www.tutorfinancial.com

About Michael Lewis CFA, MBA

Michael Lewis created Tutor Financial after a 30 plus year career in financial services as a Chartered Financial Analyst (CFA). He is an experienced professional, offering insights on investment products, strategies, and risk management.

His major career achievements include serving as a portfolio manager for a leading Canadian Investment Firm with ~$1 Billion in assets under management, managing multi-million-dollar budgets, and developing customized risk management solutions.

Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC. Advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Tutor Financial Advisors, Quest Financial Group and Cambridge are not affiliated.
These are the opinions of Michael Lewis, CFA MBA and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Please consult with your accountant and financial advisor before acting on any information contained in this article.