Are there organizations out there doing great things to make the world a better place . . . and you would like to help? Are you feeling concerned about the care and betterment of others? Perhaps there is a situation or challenge that needs to be addressed – like healthcare? Poverty? Racial inequality? Lack of proper sanitation or clean water? Educational assistance? Animal shelter/rescue? The list is endless. And, while the many worthwhile organizations can benefit from gifts of our “time – talents – touch” (our introductions) – they most decidedly will always need consistent contributions of our “treasure.”
Good news! If you are feeling motivated to give financially at least, 2021 is especially the year for you! It is possible to give 100% of your income . . . and deduct it all in 2021! The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) passed by Congress and signed into law by President Trump on March 27, 2020, included a wide variety of provisions. Many of the provisions were designed to provide immediate help to the U.S. economy, devastated by the coronavirus pandemic and the “stay-at-home” mandates of many governors.
While many of the CARES Act provisions were originally set to expire at the end of 2020, they were extended by the Congressional stimulus package signed into law by President Trump on December 27, 2020. (Side note . . . for those who like history, according to Wikipedia, the legislation was the longest bill ever passed by Congress. Do you think our Congressmembers read all 5,593 pages of the bill? I sincerely doubt it!)
So . . . strap up for a quick spin of the CARES Act and see if there is a tax strategy or two that will help you to help others – in 2021! Giving to those most in need is what many fellow Americans are doing during these challenging times . . . “Imagine That™!”
What If We Did This Instead?
Strategy: If you were originally planning to give money to a public charity over a few years, it may be better to “stack” the giving all in 2021 because up to 100% of MAGI is deductible. For example, if your original intent was to donate $100k over the next three years and your MAGI is $300k, you can donate $300k in cash in 2021 to the public charity(ies) of your choice and deduct all of it as an itemized deduction on your tax return . . . and still spread the gift to charity . . . keep reading!
- Cash contributions are normally deductible only up to 60% of your “Modified Adjusted Gross Income” (MAGI). In 2021, however, gifts of cash are deductible (in most cases) up to 100% of MAGI
- Note: While an individual can deduct 100% of their income in 2021 from federal taxes, state taxes may still be due, depending upon your state of residence
- There is still a five-year carry-over deduction if cash gifts exceed 100% of current 2021 MAGI (less for gifts of assets – see below for more on this)
- Certain types of charitable structures (including the popular Donor-Advised Fund) are not eligible to receive these contributions above 60% of MAGI, but see the next section below for a strategy on how to overcome this obstacle
Dedicated Giving Fund
|Strategy: Let’s say you wish to donate $25,000/year to one of your favorite charities for the next five years. You only get a deduction of $75,000 if you put the $125,000 into your Donor-Advised Fund in 2021. However, if you wish to deduct all $125,000, you can create a Dedicated Giving Fund, which focuses on your special non-profit. Using your Donor-Advised Fund and the Dedicated Giving Fund you can, indeed, give your charity $25,000/year but deduct the entire $125,000 in 2021!|
- An individual can get to the 100% deduction of their MAGI if they combine their 60% cash deduction with something called a “Dedicated Giving Fund.” This fund works much like a Donor-Advised Fund, except it is specifically for only one charity. Gifts to this fund are deductible for 2021, even though the gift may be distributed over many years to the specific non-profit
Maximizing Deductions for Gifts of Stock or Other Assets
Strategy: Do you have any stocks, mutual funds, real estate, etc. that is worth less than what you bought it for? You could first sell it at a loss and then contribute the cash proceeds to charity. This is true every year, but in 2021, qualifying cash donations can be deducted up to 100% of income to offset federal income tax
Additionally, selling stocks, mutual funds, real property, etc. at a capital loss can also be used to offset a capital gain from the sale of an appreciated asset
- Gifts of stock and other assets in 2021 do not benefit from the temporary charitable deduction enhancements because they are not a “Qualified Charitable Contribution”
For Those Age 70½ or Above – Remember This Clever Idea
Strategy: For those of you with money in your IRAs that are age 70½ or older, remember the strategic idea of using your IRA to make charitable gifts up to $100,000 per year! While not part of the CARES Act, it is still a great strategy
- You will not receive a tax deduction for the gift(s) to charity – since you already deducted the contribution to your IRA. However, gifts to charity count towards your Required Minimum Distributions once you begin at age 72. (New age of required distributions as of 2019 in the SECURE Act (Setting Every Community Up for Retirement Enhancement Act))
- This “Qualified Charitable Distribution” comes with special rules . . . so be sure to discuss this with us if this is an option for you. Remember that this satisfies all or part of the required distributions from your IRA. So, be sure to use this strategy if you are age 70½ or older!
Charitable Deduction for Cash Gifts Even If You Don’t Itemize
Strategy: If your deductions are less than the standard deduction for 2021 ($25,100 if married filed jointly or $12,550 if single), or if you do not want to go through the hassle of itemizing your deductions, you can make a $600 or $300 cash gift to a public charity and claim it on your 1040 tax return
- The stimulus package extended and enhanced the $300 tax deduction. For taxpayers who do not itemize deductions, the CARES Act deduction of up to $300 for cash gifts was extended to 2021
- Unlike the “above-the-line” write off available in 2020 for $300 in cash gifts, this year’s charitable deduction is no longer “above-the-line” but it is not an itemized deduction either. Instead, it is a deduction which does not impact your MAGI
- And the stimulus package created a new incentive: you can deduct up to $600 if married filed jointly for cash gifts made in 2021
- Certain types of charitable structures and Donor-Advised Funds are not eligible for this automatic $600 or $300 deduction
Corporations Can Also Deduct a Greater Percentage of Income in 2021
|Strategy: A corporation which is already giving to charity can reduce its taxes by accelerating its cash donation to a public charity and receive a deduction up to 25% of its taxable income. This will help the charity and provides the corporation with a substantially greater tax deduction currently than it would typically receive|
- The stimulus package extended the deduction of cash gifts from corporations up to 25% of their taxable income. (It reverts to a limit of 10% again beginning in tax year 2022)
- The corporation can carry forward and use any gifts in 2021 of more than 25% of their taxable income over the following five years
Conclusion: Take Advantage of the Tax Benefits in Helping Others
As you can see from the extension of some of the provisions in the CARES Act, 2021 is THE year to make large charitable contributions. Remember . . . the above provisions are good only for 2021 and are expected to expire in 2022.
Do you have a desire to help others less fortunate? This is the year to do something special. The needs are great! Let’s talk about how you can help offset the devastating economic effects of the coronavirus or other needs close to your heart. Let’s discuss your available options and how to maximize the amount of deductions available to take. Making a significant income and paying 0% in taxes to the federal government . . . while helping charities and your fellow Americans during these challenging times when they are most in need . . . “Imagine That™!”
Imagine That™! is a complimentary monthly newsletter provided by Wealth Legacy Group®, Inc. that addresses various topics of interest for high-net-worth and high-income business owners, professionals, executives and their families.
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R. J. Kelly, Wealth Legacy Group®, Inc. – September 2021
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