DeBoer Financial Group – Charitable Donation Article – 3 Part Series
Jeffrey DeBoer, ChFC®
Wealth Manager, DeBoer Financial Group, Roseville, CA
There are a number of ways that you are able to contribute to A Touch of Understanding, and other charitable causes near and dear to your hearts. However, with recent tax law changes, it is more difficult now to capture the charitable deduction than in the past. Let me share three strategies that may all help you feel great about supporting a worthy cause like A Touch of Understanding, while also securing a tax deduction!
Before the 2018 tax law changes, in 2017, the standard deduction was $6,350 for individuals and $12,700 for married couples. However, as a result of the Tax Cuts and Jobs Act (TCJA), the standard deduction in 2020 is now up to $12,400 for individuals and $24,800 for married couples. The standard deduction is even higher if you are age 65 or older. This means that an estimated 90% of U.S. households will now be better off taking the standard deduction as opposed to itemizing deductions.
Because the standard deduction is so high, taxpayers who wish to make charitable contributions may not get the additional itemized deductions that they would have in the past, which can be frustrating. However, with some proactive planning, you can utilize ways to exceed the standard deduction and start itemizing your deductions again, which will enable you to lower your tax bill when making charitable gifts.
For the 2020 tax year, the CARES Act allows for an additional, “above-the-line” deduction for charitable gifts made in cash, up to $300. Even if you are taking the standard deduction this year, you can claim this new deduction, in addition to your standard deduction. Make sure you utilize this strategy in 2020 designed to help charitable organizations and donors during this crisis.
1. Bunching and Clumping
Let’s start with “bunching” or “clumping,” a strategy that donors in every income bracket can use to get a nice tax break. The increase in the standard deduction means that many people either do not have enough deductions to exceed it, or have just enough itemized deductions to barely exceed it. For the borderline candidates, this has led to the comeback of “clumping” or “bunching” deductions, a strategy where careful planning of the timing of your deductions enables you to receive the maximum amount of deductions over a certain period of time.
For instance, take Bob and Sally. They wish to donate $9,000 each year to A Touch of Understanding. However, since they are no longer itemizing deductions due to the increased standard deduction, they won’t receive any tax benefit from making that donation.
Here’s what Bob and Sally can do… instead of donating $9,000 each year for three years in a row, they can donate $27,000 in one year, and itemize that year rather than taking the standard deduction. This means that they will take the new standard deduction of $24,000 for two years, and then itemize their $27,000 deduction to receive another great tax break in the third year (assuming they have property taxes and some other deductions, like medical expenses). Comparatively, if they donate the $9,000 each year for three years and take the standard deduction every year, they will not get a tax benefit at all from their charitable contributions!
· Pros: Allows you to receive a larger tax deduction in the years that you choose not to take the standard deduction.
· Cons: This requires planning over a two-year period (or longer) and forethought as to when the standard deduction will be taken versus when deductions will be itemized.
2. Donating Appreciated Securities
There’s also the option of donating appreciated securities, such as stocks, to charity. When donating stocks, bonds, or even mutual funds to charity, you can typically take the deduction for the full market value of the item, which can drastically increase the tax deduction. Also, when donating appreciated securities, you do not need to pay any capital gains tax, so it is much better to donate appreciated securities than to sell the stocks and donate the after-tax proceeds. The great news is that A Touch of Understanding makes it easy for you to be able to gift appreciated securities!
Let me share an example with you that demonstrates how much you could potentially save in taxes by gifting securities versus making a cash gift. This example assumes you wish to donate shares of stock worth $50,000 that you purchased for $20,000 several years ago.
3. Qualified Charitable Distributions (QCD)
QCDs can only be used by those over age 72 who have retirement accounts, such as IRAs or Inherited IRAs. QCDs provide donors with a way to receive income tax savings from your charitable gifts, even if you decide to take the standard deduction, versus itemizing. Under the new tax rules, it is much more beneficial for those who will be taking the standard deduction to use a QCD to make charitable gifts directly from their IRA.
By using a QCD, it is possible for you to make a charitable gift from your IRA and apply the gift amount toward satisfying your Required Minimum Distribution (RMD) for the year. By having it come directly from your IRA, you pay ZERO federal or state income tax on the IRA distributions because the money is going directly to the charity.
Under the CARES Act passed this year, IRA owners are not required to take RMDs from their retirement accounts in 2020. However, IRA owners can still complete a QCD in 2020 from their IRA or inherited IRA if they are age 72 or older and send money directly to a qualified charity. The benefits for still utilizing this strategy in 2020 are that the QCD allows pre-tax dollars for charitable intent and the IRA account has fewer shares after a QCD thus possibly reducing future RMDs.
Since the tax laws changed on January 1, 2018, I have found that the QCD is one of the best ways for donors to make gifts to their favorite charity, while receiving significant tax benefits at the same time! If you qualify, you should be definitely consider using the QCD to donate to charity.
· Pros: QCDs allow donors older than 72 to donate directly to charity from your IRAs without paying tax on the distributions. Using QCDs may also assist in keeping your taxable income down, which helps to avoid Medicare surcharges and potential additional taxes.
· Cons: Only donors older than 72 are able to use a QCD, IRA custodians require additional paperwork and reporting needs to done correctly at tax time. I would recommend working with an advisor well versed with this strategy.
When you are considering making a charitable gift to organizations such as A Touch of Understanding, there can be many different strategies to consider, based on your own unique objectives and financial and life circumstances. I recommend consulting with your tax and financial advisor for guidance given your own personal situation and charitable giving goals. If you have any questions I can help you with, please email me at email@example.com or call me at (916) 797-1888.
Jeffrey W. DeBoer, ChFC® is President of DeBoer Financial Group in Roseville, CA, and has more than 30 years of experience in the financial services industry. DeBoer Financial Group specializes in providing comprehensive wealth management for families and individuals who are retired and wish to preserve and grow their assets tax efficiently, and for those who are planning for retirement. The Financial Advisors of DeBoer Financial Group are Registered Representatives and Investment Advisor Representatives with/and offer securities and advisory services through Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser. This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. The office location and contact information for DeBoer Financial Group is 975 Reserve Drive, Roseville, CA 95678, www.deboerfg.com, (916) 797-1888.