You might recall that in 2017, a new tax law increased the standard deduction significantly, which resulted in fewer people itemizing, leaving no real tax incentive for charitable donations.
The Federal Government saw the importance of charitable giving in 2020 and has included provisions in the CARES Act to recognize gifts to charity in 2020 and 2021.
For your 2020 taxes, if you choose not to itemize, you will be able to deduct up to $300 of qualified charitable donations under these tax law changes through the CARES Act. The $300 is the same whether you file single or jointly. In 2021, the limit increases to $600 for those who file jointly and $300 for married filing separately. Single filers will still have the $300 limit. Other charitable gifting rules remain unchanged, including gifting of investments and Qualified Charitable Donations (QCD) from IRAs.
Donating investments (especially highly appreciated securities such as stocks) instead of cash can be a very tax-efficient way to support a charity. If you sell the stock or bonds first then donate the proceeds to charity, you will pay tax on the gain. Contributing securities you’ve owned for more than a year directly to the charity usually allows you to deduct the full fair market value of the stock plus pay no capital gains tax. For large donations, keep in mind that there are limits on how much can be deducted per year. The limits vary based on what was donated, but stock donations are generally limited to 30% of your adjusted gross income (AGI). AGI is your gross income before your standard or itemized deductions and, if applicable, your qualified business income deduction. If your donation is limited, the excess will carry forward to a future year.
For those 70 ½ or older, QCDs from an IRA allow a direct transfer of funds from your IRA to a qualified charity. QCDs can be counted toward satisfying your annual required minimum distribution (RMD) if certain rules are met, such as transferring the funds directly from the IRA to the charity without first being distributed to you.
A QCD excludes the amount donated from taxable income, unlike regular IRA withdrawals. This type of donation does not require you to itemize and, by keeping your income lower, may reduce the impact to certain deductions or credits. While RMDs were waived for 2020 they are required again for 2021.
However you make a difference with gifting to charity, in order to claim a deduction, there are few things you must keep in your records:
For any donation of $250 or more (including contributions of cash), you must obtain and keep in your records a contemporaneous written acknowledgement from the qualified charity indicating the amount of the cash and a description of any property contributed. The acknowledgment must say whether the organization provided any goods or services in exchange for the gift and, if so, must provide a description and a good faith estimate of the value of those goods or services.
If you receive any goods or services in exchange for your donation, you must reduce your deduction by the value of what you received.
For non-cash gifts in excess of $5,000 ($10,000 for closely held stock) you’ll need an independent appraisal. You don’t need an appraisal for gifts of exchange-traded stocks, bonds or mutual funds.
Always remember that only donations to qualified organizations are deductible. Not all non-profits are considered qualified. Qualified organizations include 501(c)(3) charities, state and local governments, and school districts. Contributions to political campaigns or gifts directly to a needy individual do not qualify.
So many of our regions’ charitable organizations have struggled during the pandemic. Your contributions in 2020 and 2021 are helping them sustain operations and prepare to bring quality of life benefits once again to our communities – and that is the ultimate incentive for giving!
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