The COVID-19 pandemic has changed life as we know it, including people’s attitudes toward charitable giving and the accompanying benefits. During this trying time, many Americans have become more aware of the financial struggles and social injustices faced by some communities in our country. The increase in charitable giving seen over the past two years is likely attributable, at least in part, to this development.
Many people have started looking into impactful ways they can support specific groups, charities and causes. Charitable donations can positively impact not only society and marginalized communities, but also the donor’s tax situation. To that end, there are some important aspects to consider when you want to integrate such contributions into your financial plan.
Growth in Charitable Giving
In the past, grants and donations were typically very structured and often given with the understanding they would be used for a specific purpose. Now, donors are less likely to tell charities what to do with their donation, giving the charities more freedom to use that money as they see fit.
For a donor, it’s important to determine how much you care about the ways your contributions might be used. Does it matter to you to be able to track it? If you do want your gift to go toward a specific cause or project, then you need to clarify that with a charity before making your donation.
The markets have rallied impressively since the steep pandemic-induced drop in February/March 2020. Because of this strong performance, many people have highly appreciated assets that would trigger long-term capital gains taxes. These taxes can sometimes be avoided, however, by making charitable contributions instead. It’s important to talk with an advisor about whether this would be an option for you and how much sense it might make in your situation.
Tax Benefits of Donating
Under the CARES Act, several tax considerations have changed, with many deductions now being greater than they were in the past. When assessing how these deductions can work for you, it’s important to decide whether you will itemize or not. If so, you will be able to deduct cash contributions to qualifying public charities up to 100% of your adjusted gross income. Prior to the CARES Act, the limit was 60%.
If you aren’t itemizing, there’s an above-the-line deduction of $300 if single or filing separately, and $600 if married, filing jointly. This is significant for many people, and knowing about it might encourage more of them to donate in order to receive that tax deduction. Charitable giving doesn’t have to entail thousand-dollar gifts. Smaller amounts can still make an impact on charities as well as your taxes.
The large deductions implemented by the CARES Act will likely be removed in the near future. But for now, they represent a significant incentive to leverage when filing your 2021 return. Additionally, the estate and gift tax exemption for 2021 is $11.7 million for individuals. While this amount is far higher than most Americans ever need to consider, it’s still something that high-net-worth individuals should keep in mind during the upcoming tax season.
Long-Term Planning for Philanthropy
When thinking about incorporating charitable giving into your financial plan, sit down with your advisor to figure out exactly what you’re trying to accomplish. Do you want to decrease your taxable income to get into a lower tax bracket? Are you trying to manage capital gains in order to reduce taxes on your assets? These are important questions to consider when building a plan with regular donations in mind.
Some people set up recurring donations that can be planned for in their yearly financial strategy. However, donors should consider what they want to accomplish from a charitable standpoint and see if that goal can be better reached with one larger gift than smaller gifts given year after year. For example, donating $10,000 this year might produce greater tax savings or put you in a lower income tax bracket, versus donating $1,000 a year for 10 years. Often, additional savings are realized when amounts are combined and given at once rather than little by little.
If you’re nearing retirement, you may want to consider your post-retirement income because it will likely be different from your current income. This may affect your ability to continue making the same charitable contributions, so ensure that you are continuously adapting your financial strategy. Additionally, if you itemize deductions and can leverage charitable donations to get into a lower income tax bracket, it may be a good time to offset your tax liabilities on tax-deferred retirement accounts by converting portions of your Roth IRA.
The pandemic has opened many people’s eyes to the importance of giving, increasing their awareness and encouraging them to take a more proactive approach to charity. As we move into a new year and tax season, now is a good time to set goals for charitable giving and determine the most tax-efficient ways to achieve them.
Kyle Bingham
Senior Financial Consultant
[email protected]