How Much Charitable Giving Is Tax-deductible
The negative impact of Covid-19 on charitable gifting in San Diego County is only increasing as economic uncertainty grows and Covid-19 spreads. The Tax Cuts and Jobs Act of 2018 have already had a significant impact on charitable contributions. This act, which decreased the taxpayers’ ability to claim itemized deductions as a result of the rise in the standard deduction (from 46 million in 2016 down to just 18 million in 2018), had already had a significant impact on charitable giving. The Covid-19 pandemic has made it difficult for nonprofits to continue serving San Diego.
Even worse, many of those who need help from non-profits are also the ones most affected by the pandemic. The current unemployment rate in San Diego is 15%. There are many ways to donate to charity, and you can save money on taxes. This article will discuss the best ways to save taxes and give to non-profits, as well as highlight great nonprofits doing incredible work in San Diego.
What’s Happened in 2021
If they take the standard deduction, donors can claim a universal tax deduction of up to $300 for their 2021 tax returns under the CARES Act. This means that taxpayers who do not itemize deductions may give $300 to get a deduction. Also known as an above-the-line deduction.
Taxpayers who itemize deductions will now be able to take advantage of an additional tax incentive, which increases the charitable contribution cap from 60% of your adjusted gross income (AGI) up to 100% in 2021. The new legislation will ensure that all taxpayers who donate to charities receive higher tax incentives.
Let’s take, for example, a taxpayer with $500,000 in AGI for 2021. He would like to make $1 million charitable contributions this year. The income tax deduction for income taxes in previous years was limited to $300,000., 60%, or 500,000.
The CARES Act permits a $500,000 charitable contribution deduction, which is 100% of AGI for this year. This would still allow for an additional $500,000 million in charitable contribution carry-forward (subject to the 60% AGI limit) which can be used in subsequent tax years.
Higher Deduction Limits for Corporations
The CARES Act increases the annual cash gift limit for corporations that want to expand their charitable giving efforts. It raises it from 10% to 25% of their taxable income. Each shareholder or partner must choose to get the additional charitable deduction on their taxes.
Higher Incentive For Food Donations
The CARES Act, in addition to cash donations and food donations, now encourages large-scale food donations. In response to increased visibility and worsening food insecurity, the tax deduction for food inventory has been increased from 15% to 25% for 2021. Donors of food to local food pantries can claim the tax value on their taxes.
If you have a restaurant that has a $100,000 income and donates $25,000 worth of food inventory, your business’s tax liability can be reduced to $75,000. You can write off $25,000 if you are able to donate more than 25% of the AGI, let’s say $50,000. The $25,000 additional will be carried over to the next tax year.
Traditional Gifting Strategies
Donating Appreciated Securities
Donors who have appreciated securities, such as stocks, in their brokerage accounts can donate these securities to avoid capital gains taxes upon potential sale. You also get the benefit, if you itemize deductions.
Let’s take, for example, Apple stock purchased for $20,000; its current value is $50,000, and you fall within the combined federal-state marginal tax bracket of 25%. You will be responsible for $7,500 in taxes if you sell your position.
Capital gain tax rates can reach as high as 37% so this is a great way to increase the amount you give to charities and lower your tax bill. Non-profits don’t pay taxes on the sale of securities, so both sides get a significant benefit. Fidelity Investments offers an easy calculator that can help you estimate your savings potential.
Create A Donor-Advised Charitable Giving Fund
A donor-advised fund allows you to give money to charity in a tax-efficient and simple way. Most custodians or brokerages can set up a donor-advised account. The brokerage account will then allow you to make a cash donation or other assets. This allows you to deduct your charitable gift from your tax return because the donor-advised funds are a program of public charities. After the donation has been made, you can choose which charities you wish to donate to.
You can choose when you want to donate and which charities. Let’s suppose you have a higher income and are donating $10,000 annually to charities. You can make a $50,000 donation to a donor-advised account in the current year to receive the full tax deduction. However, you can continue to give your $10,000 annual gift to charity each year for the next five years. Because the funds are designated as charitable contributions, any growth in the account is exempt from tax.
A Charitable Deduction To Facilitate A Roth Conversion
One popular strategy for tax planning with retirement accounts is to make a charity donation to offset the tax cost of converting a Traditional IRA into a Roth IRA. While converting a traditional IRA into a Roth IRA can mean paying substantial taxes, a charitable donation can offset this income. If you are a regular donor to a charity and have enough assets for the conversion, this strategy might be a good choice.
Qualified Charitable Distributions (QCDs).
Clients over 70.5 years old who had taken Required Minimum Distributions from their IRA accounts might have done a Qualified Charitable Deduction. The law allows donors to donate up to $100,000 from their RMD to any qualifying charity of their choice.
While the amount donated to charity was included in the donor’s RMD for that year, it was not included in their taxable income. RMDs have been waived by the CARES Act in 2021. However, this strategy is still popular and can be used to plan for retirement accounts in future years.
If donors want to give more than the above strategies, charitable trusts can be a great way to make a gift during your lifetime or leave a lasting legacy. These trusts can be irrevocable. The primary types of charitable trusts are Charitable Remainder Trusts and Charitable Lead Trusts.
Charitable trusts provide a fixed amount of income to charitable organizations. The remainder of income reverts to the beneficiaries or remains in the trust until the grantor dies. CLTs can be a great way to give if you don’t require a specific amount of income or if your primary goal is to donate money to an organization.
charitable remainder trusts (also known as split-interest trusts) make payments in the opposite direction to CLTs. First, the donor transfers an asset to an irrevocable Trust. First, income from a charitable trust for charitable remainder goes to one or more beneficiaries in a set amount during their lives, and then the rest goes to charity at the end.
There are many ways that we can support nonprofits in these tough times. You can volunteer your time, donate items that you don’t need, or give financial resources. The tax system encourages charitable giving via tax incentives. 2021 is one of the best years for this, according to recent tax law changes. Your financial tax advisor can help you determine if these gifting strategies work for you.
This post was written by All Seasons Wealth. At All Seasons Wealth, we provide expert advice and emphasize the importance of creating in-house portfolios to personalize your strategy for asset management, financial planning, and cash management. We utilize research and perform market analysis to provide you with a Financial Planner In St Petersburg FL. No matter your needs, we can work with you to develop a consulting solution tailored to you.
Any opinions are those of All Seasons Wealth and not necessarily those of RJFS or Raymond James. Investing involves risk and you may incur a profit or loss regardless of the strategy selected. Investing involves risk and you may incur a profit or loss regardless of the strategy selected. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, and time horizon before making any investment. Past performance may not be indicative of future results.