The end of 2021 is quickly approaching, so in addition to planning for the holidays, it’s also time to think about our 2021 taxes.
When President Joe Biden’s infrastructure bill becomes law, tax changes will occur for both individuals and corporations. If you are a high-net-worth individual, consider meeting with your estate planning attorney or certified public accountant this year to discuss advanced gifting strategies that are more complicated than addressed in this article.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law March 27, 2020. This relief package offered significant incentives for families that are charitably inclined to help support the causes they care about while also gaining significant and meaningful tax savings.
The Consolidated Appropriations Act (CAA), which was passed Dec. 27, 2020, extended and expanded many provisions of the CARES Act for 2021, which continues to make this a favorable time for making charitable contributions.
How can you make a difference in someone’s life?
Gifting money to family, friends
You can give $15,000 outright to as many people as you desire. The gift tax exclusion in 2021 is again $15,000 per person for a single filer.
If you are filing a tax return jointly with your spouse, as a couple you’re allowed to give a total of $30,000 to an individual. But if you give one person more than $15,000 (as an individual) or $30,000 (as a couple), the amount over the IRS threshold is reported to the IRS and will reduce your lifetime gift tax exclusion amount, which in 2021 is $11,700,000.
Taxpayers who do not itemize their deductions in 2021 will be able to claim a deduction from gross income for up to $300 in cash donations to public charities. New in 2021 is an additional “above-the-line” deduction for those married filing jointly. Joint filers (who aren’t itemizing) will be allowed to take an above-the-line deduction of up to $600 in cash contributions to charity this year.
Individual taxpayers who itemize their deductions may now deduct certain charitable contributions up to 100% of the taxpayer’s adjusted gross income. Prior to the CARES Act, taxpayers were limited to deducting certain charitable contributions up to 60% of the taxpayer’s AGI.
The requirements for deductibility up to 100% of AGI:
–Donations must be in cash.
–Donations must be made to a public charity (not to a donor-advised fund or most private foundations).
–Donations must be made during 2021.
If a donor gives more than 100% of his or her AGI, the donor may carry forward excess deductions for up to five subsequent tax years (although the enhanced deductibility is set to expire after 2021).
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 more than 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 the net after-tax value.
–For donations of appreciated securities made to a private foundation, the donation is limited to 20% of your AGI.
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 2021.
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 directly from their individual retirement accounts to their favorite qualified charities. Account-holders older than 72 years old can gift some or all their required minimum distribution directly to charity. This amount is not included as income for tax purposes.
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 Dec. 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.
However, under the CARES Act, an individual can elect to deduct 100% of his or her AGI for cash charitable contributions. This effectively affords individuals over 59½ years old the benefits similar to a QCD: They can take a cash distribution from their IRA, contribute the cash to charity, and may be able to completely offset tax attributable to the distribution by taking a charitable deduction in an amount up to 100% of their AGI for the tax year.
If you’re planning a large donation in 2021, this may be a smart strategy as long as you are between the ages of 59½ and 70½ and are not dependent on existing retirement 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.
A donor-advised fund 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 DAF 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 to be distributed to his or her favorite charities. Additionally, assets in a DAF are not included in the donor’s estate at death.
You are able to deduct up to 60% of AGI in cash and up to 30% of AGI in appreciated assets contributed to a DAF.
Donor-advised funds can be established at your local community foundation or through companies such as Fidelity, Charles Schwab, or Vanguard.
If your finances afford you the ability to share your wealth, consider a gifting strategy that works for you. 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 [email protected].