This year started out with a bang; the economy was strong, unemployment was low and the stock market was approaching new highs. And then, seemingly overnight, the coronavirus spread to the United States and our lives quickly changed. Most people tightened their belts, afraid to spend money because the unknown was overwhelming.
Many nonprofit organizations have been shaken to their core by the effects of COVID-19. The need for services from nonprofits this year has not diminished, but most likely increased. Unfortunately, due to a lack of fundraising and program cancellations, many nonprofit organizations are struggling to meet their funding goals. Fundraising events are significant revenue streams for many organizations. According to the 2018 Global Trends in Giving Report, 56 percent of average donors regularly attend fundraising events. Due to the pandemic and the inability to hold a fundraising event, more than half of charitable organizations in the United States expect to raise less money in 2020 than they did in 2019. An equal percentage believe the same will occur in 2021, according to the Association of Fundraising Professionals.
The CARES Act was signed into law on March 27, a relief package offering significant incentives for families that are charitably inclined to help support the causes they care about while also gaining significant and meaningful tax savings.
So, how can we help our local charities this year?
For individuals who itemize their deductions, the CARES Act increased the deduction for cash donations to charities to 100% of adjusted gross income for 2020. Individuals may deduct up to 100 percent of their gross income for cash donations to public charities (up from 60% in 2019). One caveat is that these donations apply only to qualified public charities and not donor-advised funds or private foundations.
Taxpayers who do not itemize in 2020 will be able to claim a deduction from gross income for up to $300 in cash donations to public charities.
Donating long-term, highly appreciated taxable securities—stocks, mutual funds, and exchange-traded funds that have realized significant appreciation over time—is one of the most tax-efficient ways to give. You receive a tax deduction for the full value of the gift without having to pay the capital gains you would have paid if you sold the securities.
To qualify, the assets must be held over one year, and there are numerous benefits:
• Capital gains taxes are avoided on the future sale of the securities.
• A tax deduction is received for the full fair market value of the securities, up to 30% of AGI.
• You can significantly increase the amount of funds available for charitable giving because you are not paying capital gains taxes on the gift. You are gifting the full value of the security, not an after-tax net value.
Most banks and brokerage firms can assist you with this transaction but will require you to sign a letter of instruction to transfer the shares to a charity. Do not wait until the last week in December to begin this task, or it may not happen in 2020.
Qualified charitable deductions
At the end of 2015, lawmakers approved a permanent measure allowing individuals who are 70½ years old or older to make qualified charitable distributions (QCDs) directly from their individual retirement accounts (IRAs) to their favorite qualified charities.
A few facts:
• The QCD can be made only on or after the date the IRA owner is 70½ years old.
• The distribution must be paid directly from the IRA to the qualified charity.
• QCDs are limited to $100,000 per person annually and must be distributed by December 31 of the calendar year.
• The charitable distribution can satisfy the IRA’s annual required minimum distribution (RMD), but not exceed it.
• When tax returns are filed, the QCD reduces the IRA owner’s AGI.
• QCDs are not subject to tax withholdings.
Account holders older than 70½ can gift some or all their required minimum distribution (RMD) directly to charity. This amount is not included as income for tax purposes.
For taxpayers who do not need the income in 2020 from their RMDs, consideration should also be given to the option to suspend 2020 RMDs and make charitable donations from personal funds.
Donating assets to a charitable trust provides a tax deduction and removes the assets from the donor’s estate. Depending on the type of trust established, these assets could provide a future benefit for the donor or heirs.
Avoid capital gains tax on the sale of real estate, private company stock, and other nonpublic assets when you gift them to charity. Receive a charitable deduction for the value of the asset. Most charities may not be set up to accept alternative donations directly, so consider utilizing a donor-advised fund.
A donor-advised fund (DAF) is a charitable savings account that allows you to fund the account and capture the charitable deduction, without immediately selecting a specific charity. Donations to a donor-advised fund can be made at any time, but when they are made, they are irrevocable. The funds grow tax-free for the sole purpose of funding IRS-qualified public charities. Over time, the donor recommends grants that will be distributed to their favorite charities. Additionally, assets in donor-advised funds are not included at death in the donor’s estate.
Donor-advised funds can be established at your local community foundation or through companies such as Fidelity, Charles Schwab, or Vanguard.
This year began on a high note but was derailed due to COVID-19. It can, however, end positively with the knowledge that you supported your community by donating to your favorite local charities. Research has revealed that spending money on others makes us happier than spending it on ourselves, and giving to others can make us healthier, too.
Teri Parker CFP® is a vice president for CAPTRUST Financial Advisors. She has practiced in the field of financial planning and investment management since 2000. Reach her via email at Teri.firstname.lastname@example.org.