Charitable Giving: Helping Yourself While Helping Others

As 2020 draws to a close, there is still time to potentially reduce your personal income tax liability while helping people and organizations. The Coronavirus Aid Relief and Economic Security (CARES) Act passed in March along with existing tax laws provides a variety of options for tax savings through charitable giving. Among these options are: an above-the-line deduction for contributions, an increased limitation for cash contributions, contributions of appreciated securities, and contributions to donor advised funds. A little planning in your charitable giving can go a long way towards maximizing your tax benefits.

The above-the-line deduction. Under the CARES Act, those taxpayers who do not itemize their deductions are eligible to deduct up to $300 of charitable contributions above the line for 2020. This means the deduction is subtracted from gross income to arrive at adjusted gross income. The contributions must be made to a qualified organization, and the donor must retain a contemporaneous written acknowledgement from the organization for any contribution of $250 or more. This provision has now been extended to 2021 under the Consolidated Appropriations Act, 2021, which has not been signed into law as of this writing.

Increased cash contribution limitation. This is another new provision under the CARES Act that has also been extended to 2021, assuming that the Consolidated Appropriations Act, 2021, is signed into law. The limitation on deductible cash contributions up to 60% of adjusted gross income has been suspended. Individuals can receive an itemized deduction for their cash contributions up to 100% of their adjusted gross income for contributions made during 2020 or 2021 on their respective tax returns. Contributions above the limitation may be carried forward up to five years.

Contributions of appreciated securities. Taxpayers who typically make cash contributions may want to consider gifts of appreciated securities. These gifts provide tax benefits beyond a deduction for the fair market value of the contributions. Gifting of appreciated securities also relieves the burden of paying capital gains tax when the securities are sold.

For example: If a taxpayer in the highest tax bracket makes a $100,000 cash contribution in 2020, the contribution results in a federal tax benefit of $37,000 ($100,000 contribution X 37% marginal tax rate). If instead the taxpayer makes a contribution of appreciated securities with a fair market value of $100,000 and a cost basis of $50,000, the resulting tax benefit will be $48,900. Not only will the taxpayer receive the $37,000 benefit for the contribution, the taxpayer will not pay $10,000 in capital gains tax on the $50,000 of appreciation ($50,000 gain X 20% capital gains rate) or $1,900 of Medicare tax on the sale of stock. The taxpayer can then buy the same securities at current market prices. This leaves the taxpayer using the same cash outlay and holding the same securities with an increased tax benefit.

It is worth noting that the securities must be held for at least 12 months prior to contribution and the income limitation to deduct cash contributions is much higher than the limitations for gifting appreciated securities. As mentioned earlier, taxpayers can deduct their cash contributions up to 100% of their adjusted gross income in 2020. The deduction for contributions of appreciated securities to public charities is limited to 30% of adjusted gross income while contributions of appreciated securities to private foundations are limited to 20% of adjusted gross income. Contributions above these limits may also be carried forward up to five years.

Donor Advised Funds. Donor Advised Funds (DAF) are the perfect vehicle for those who want to receive a charitable deduction in the current year but are not ready to contribute to specific organizations. These funds are typically administered by public charities or charitable funds affiliated with investment advisers which are tax-exempt charitable organizations. In exchange, the funds charge nominal management fees.
A donor may contribute cash, securities or other assets to the DAF which are held in the donor’s own account. While the donor forfeits the right to ever recover the contribution to the fund, the donor generally maintains control over where and when the account’s assets are distributed. However, the distributions must go to qualified charitable organizations.

There are many options available to accomplish your charitable giving goals while maximizing your tax savings at the same time. Options can range from simply making a one-time cash contribution to a favorite charity to the complexity of making gifts through a trust over a period of several years. Given that preferences and circumstances are different for everyone, it is always a good idea to review your charitable giving plans with your tax advisor.

Please reach out to your Citrin Cooperman advisor for further planning considerations.