By Bill Reiner, CFP®, ChFC®
Charitable giving helps the causes that are important to us, while also helping to reduce our tax burden. And because of the difficult year 2020 has been for so many, you may be looking to give more if you’re able. But how and when you choose to give to others can affect how much of a tax benefit you receive. That’s more true this year because of the CARES Act. Learn how “bunched giving” in your charitable strategy can help you make the most of your charitable deductions.
Why Bunch Your Charitable Giving?
The current standard tax deduction for married couples filing jointly rose to $24,000 starting in 2018 due to the Tax Cuts and Jobs Act. Because of that higher dollar figure, it makes more sense for many taxpayers to take the standard deduction rather than go through the hassle of itemizing. However, taking the standard deduction means that you can’t deduct charitable contributions from your tax bill.
Enter bunched charitable giving. With bunched giving, you “bunch” your planned giving for two years into one tax year. By doing that, you help ensure you are giving enough in one year so that itemizing makes sense, while opting for the standard deduction in the other years.
Thanks to the CARES Act, individual donors can deduct more in cash contributions than in years past, which can make 2020 a good year to consider donating a greater amount. You can deduct up to 100% of your adjusted gross income in 2020, compared to 60% in years past. Because of that, you may also look to sell appreciated securities this year, and then donate the cash value, instead of just donating the securities themselves.
Give Through A Donor-Advised Fund
What if you would like to contribute money by a year-end deadline but don’t want to rush through your giving decisions? One way to do that is through a donor-advised fund, which lets you contribute a sum of money at once, then distribute those funds to nonprofits on your schedule, which can span years if you prefer. Note that you can contribute securities or other assets besides cash to a donor-advised fund.
For example, you can contribute $30,000 today to a donor-advised fund, capturing the total amount as a tax deduction for the current tax year, then donate $10,000 a year to causes you care about for the next three years. This allows you to “bunch” your contribution so you can itemize, and yet still give annually to your selected charities.
Most large financial firms offer donor-advised funds to their clients, and a financial advisor can help you navigate whether this option would work for your charitable giving plans. The money you contribute to a donor-advised fund can be invested through the firm’s investment options for tax-free growth.
Contributing to a donor-advised fund can also be a smart strategy if you want to capture the tax benefits of charitable giving before the end of a calendar year but haven’t had the time or don’t want to rush how you distribute the money. Note that cash donated to a donor-advised fund is not eligible for the higher cash deduction limit under the CARES Act.
Qualified Charitable Distribution
A qualified charitable deduction (QCD) may be another opportunity for your year-end planned giving. A QCD involves directing the required minimum distribution (RMD) those over age 70½ must take directly to the charity. This contribution counts toward your RMD for the year and yet is excluded from your taxable income. In years past, your charitable contribution would simply offset the taxable income from the distribution. This is no longer the case. The maximum allowable amount you can donate this way is $100k.
It’s important to note that the CARES Act eliminated RMDs for 2020, so this may not be the best strategy for 2020, but certainly one to consider in future years if you are faced with such distributions.
Maximize Your Charitable Giving
Many of us want to give back. Having a strategy for your charitable giving can bring you rewards, but creating a charitable giving plan can be complicated. If you’re one of my existing clients, we can always meet to obtain an update on your circumstances and see if any adjustments should be made. If not and you’re interested in learning more, call me at (215) 340-2360, email firstname.lastname@example.org, or schedule a free 30-minute consultation by clicking here.
About Bill Reiner, CFP®, ChFC®, Financial Advisor
Bill has been in the financial industry since 1995, earning numerous professional designations, including the Certified Financial PlannerTM Certification in 1999. Clients work with Bill because of his honesty and unwavering devotion to superior client service. He helps clients discover what financial strategies work best in helping them achieve their goals and objectives. When taking on new clients, he works diligently to gain their trust and help them understand the solutions he recommends.