As we sail through the holiday season and past Giving Tuesday 2021, more people will get a tax deduction for their philanthropic endeavors. While many Americans are suffering under the weight of the COVID pandemic, the economy is chugging along. Real estate and the stock market values are soaring, and the economy is nearing full employment. Some of you reading this may be feeling generous this time of year, and luckily, you may get an additional tax break for your tax-deductible donations to charity.
Under the Tax Cuts and Jobs Act (TCJA), an estimated 90% of taxpayers will use the standard deduction when filing their federal income taxes. When you don’t itemize your tax deductions, you typically won’t get any additional tax savings from donating to charity. However, in 2021, U.S. taxpayers can deduct up to $300 in charitable donations made this year, even if they choose to take the standard deduction. One donation of $300 may not move the needle much but multiplied across millions of donations; the impact for charities can be huge.
These numbers are double for legally married couples. You can deduct $600 in a charitable donation in 2021, even if you take the standard deduction.
If you are able, please consider donating at least $300 this year ($600 if you are a married couple) to a nonprofit close to your heart. I know many of you are having a record year; consider making a more sizable charitable donation. If the never-ending lines at food banks across the country are any indication, your generous donations are needed now as much as ever.
Keep in mind that December 31st is the deadline to make charitable donations for 2021. Donations processed after this date won’t receive a tax deduction for the tax year 2021. It is expected this tax break will not be back in 2022, so it is essential to make the contribution this year if you want the tax break.
The other change to charitable donations in 2021 allows for a full tax deduction this year for donors making gifts up to 100% of their income. For tax year 2021, you can potentially donate 100% of your income to charity and receive a full tax deduction for 100% of your donation. This is assuming you itemize your tax deductions in 2021. Additionally, this scenario could be beneficial for someone who is retired (or semi-retired) and doesn’t show much in the way of earned income. Normally, tax benefits for donations to charity are capped at 60% of income. Charitable donations beyond this amount can be deducted over the next five years. Donations to donor-advised funds are not eligible for this larger contribution limit. Your tax-deductible charitable donation must be made directly to an eligible nonprofit.
Many of my financial planning clients are intrinsically motivated to give but making tax-efficient money moves can allow them to further stretch their charitable donations. For example, if you have $10,000 to donate, with the tax savings, you may be able to give closer to $15,000 to charity. The exact number would depend on your state and federal income tax brackets; I’m offering tax planning advice from Los Angeles, which falls under the high-tax rates of California.
Below The Line Tax Deduction
The $300/$600 tax deduction when you aren’t itemizing is what is known as a “below the line” tax deduction. What this means is your taxable income will decrease, but not your adjusted gross income (AGI).
You may be able to get additional tax benefits by donating highly appreciated stocks. When applying this tax strategy, you get a deduction for the full value of the stocks you are donating but avoid paying capital gains on the increase in value before making the donation. If you are looking to go this route, don’t wait until the last minute. These transactions can take time to complete.
Qualified Charitable Distributions from an IRA
A qualified charitable distribution (QCD) is another way to potentially donate more tax efficiently. The tax strategy allows IRA owners who are 70.5 or older to donate IRA assets directly to the charity. Thus, you avoid paying taxes on your distributions. This tax-minimizing strategy is limited to $100,000 per year. For those age 72 or older, your QCD could be used towards completing your required minimum distribution (RMD) for 2021.
To be clear, technically, you won’t get a tax deduction for your QCD to charity. But at the same time, you aren’t required to pay taxes on the distribution, and it isn’t counted towards your AGI. This could help keep other income streams in lower tax brackets or potentially even reduce your Medicare premiums and taxation of your Social Security benefits.
LOS ANGELES, CALIFORNIA – SEPTEMBER 14: Marie Kondo attends the 2019 Creative Arts Emmy Awards on … [+]
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How To Get a Charitable Tax Deduction
To receive this specific tax deduction for the donation, you must make a cash donation to charity before the year’s end. While I am using the term cash, I just mean a monetary donation, which could include appreciated stock. Sadly, this will not include Marie Kondo organizing your closet and donating the items that no longer spark joy to a nonprofit like Out of the Closet. However, these types of in-kind donations are still deductible for those who choose to itemize their tax deductions. Your donation must also be made to a qualified 501(c)(3) public charity. Gifts to private foundations or individuals are ineligible. The IRS offers a search tool to help you verify which organizations are eligible to accept tax-deductible donations.
How To Find the Right Charity to Donate To
There are a wide variety of charities to choose from, depending on what inspires you to be generous. There are always people in need, now more so than ever. When choosing a charity or charities to support, look for a nonprofit organization with a mission statement and purpose that aligns with something you truly care about. This could be animal welfare, LGBTQ+ rights, performing arts, and so on. You might choose your local food bank, as there are millions of Americans worried about where their next meal will come from.
If you are concerned about how much of your donation will actually go to help those in need, websites like Charity Navigator can help donors evaluate charities.