Learn About New Tax Rules for 2021 That Provide Extra Tax Savings Opportunities for Charitable Giving
Edward A. Zurndorfer
December 31, 2021 is the last day for individuals to make tax-deductible contributions for the year 2021. During the COVID-19 pandemic, Congress made two key tax law changes resulting in enhanced tax savings for charitable giving. One change allows individuals who did not itemize on their federal income tax returns (that is, they do not file Schedule A) and instead take the standard deduction to obtain some tax savings of up to $300 (if filing as single or head of household) and up to $600 if filing married filing joint, a result of making cash/check/credit card charitable contributions. Until this change, individuals who elected to take the standard deduction to file their federal income tax return did not benefit from any tax savings resulting from their cash/check/credit card charitable contributions.
The other tax savings opportunity is for individuals who do in fact itemize on their federal income tax returns and who make charitable donations in the form of cash/check/credit card, donations of personal items (such as clothing, used furniture, other household items, and cars/trucks) and donate appreciated investment securities. They are allowed to include as part of their itemized deductions the charitable contributions they made during 2021. The upper limit of these charitable contributions is 100 percent of their adjusted gross income (AGI). Until this tax law change, the upper limit for making charitable contributions in any year was 60 percent of an individual’s AGI.
Both of these tax law changes are due to expire on Jan. 1, 2022. Together with the surge in the stock market during 2021 makes the year 2021 a favorable year for charitable-inclined individuals to be rewarded in the form of tax savings. With the end of the 2021 calendar year less than two weeks away, it is important to review the specific IRS tax rules for charitable giving.
For the year 2021, individuals who do not itemize deductions on their federal income tax returns and instead use the standard deduction can deduct cash/check/credit card donations to qualified charities of up to $600 (married filing joint filers) and $300 (single or head of household filers) filers. Cash donations made by check, credit, or debit card and electronic funds transfer qualify. On the 2020 federal income tax return, the $300 deduction (per tax filer – whether filing as single or married filing joint) was an “adjustment to income” line item (an “above the line” deduction, thus reducing AGI), while on the 2021 federal income tax return the $300 deduction (for a single or head of household filer) and $600 deduction (for a married filing jointly filer) is a subtraction from the filer’s taxable income (a “below the line” deduction, thus reducing one’s taxable income). The cash/check/credit card donations must be made to a qualified charitable organization and made no later than Dec. 31, 2021. Per usual, an individual making these cash/check/credit card donations must get a receipt from the qualified charitable organization acknowledging the donation.
For 2021, those individuals who itemize on their income tax returns can benefit from a larger deduction for charitable donations. They can deduct charitable donations of up to 100 percent of their AGI. In so doing, these individuals may have to “bunch” their cash/check/credit card donations into 2021. In other words, if they were intending to make some cash/check donations in early 2022, they may want to make these donations in December 2021 in order to benefit from the higher contribution limit. Note that if they use a credit card to make their charitable contributions during December 2021, they will get credit for the charitable contribution for the year 2021 even though they will pay their credit card bill (which includes the charitable contributions charged during 2021) sometime during January or February 2022.
Donations of Appreciated Stock
Those individuals who own appreciated publicly traded stock shares that they have owned for more than a year can donate those stock shares to a qualified charitable organization. In so doing, they will avoid paying capital gains tax on the stock appreciation and ending up with a larger charitable donation rather than selling the stock shares, paying the taxes due on the sale, and then donating the net cash to a charity. This is because by donating the appreciated stock shares, they can include as a charitable contribution the fair market value of the stock shares on the day the shares are donated. The individual would have to itemize on their income tax return in order to do this.
The following example illustrates:
Peter is a high-income (37 percent federal marginal tax bracket) charitable donor who owns 100 shares of XYZ publicly held stock currently worth $10,000 and that he purchased 5 years ago for $4,000. Peter would like to donate those stock shares to his favorite charitable organization. If instead Peter was to sell the stocks, he would owe capital gains tax (20 percent at his federal marginal tax bracket), plus a net investment income tax of 3.8 percent for a total tax of 23.8 percent. The 23.8 federal income tax will be imposed on the $10,000 less $4,000, or $6,000 of XYZ stock shares appreciation. 23.8 percent of $6,000 equals $1,428 of federal income tax (plus state income tax if applicable) that Peter would be liable for. Peter would then be left with $10,000 less $1,428, or $8,672 of net cash for Peter to donate to a qualified charity and be able to deduct on his federal income tax return. If instead Peter donates the stock to his charity, then he would be eligible for a full charitable donation deduction of $10,000. The charity will typically sell the shares and keep the full $10,000 proceeds, paying no capital gains tax because a qualified charitable organization pays no federal and state income taxes.
Those individuals who have a brokerage account and who are interested in donating appreciated capital asset (stocks, bonds, ETFs, open-ended or closed-ended funds) should not wait until the very end of December to do so. They are encouraged to check with their registered representative/stockbroker immediately to determine how quickly the brokerage can make a transfer.
Qualified Charitable Distributions (QCDs)
Owners of traditional IRAs who are over age 70.5 are eligible to directly donate up to $100,000 per year of their IRA account to one or more charities. If the traditional IRA owner has reached his or her “required beginning date” (RBD) (April 1 following the year the IRA owner became age 70.5 (if the IRA owner was born before July 1, 1949, or April 1 following the year the IRA owner becomes age 72 for IRA owners born after June 30, 1949), these “qualified charitable distributions” (QCDs) can be counted towards the traditional IRA owner’s required minimum distribution (RMD) from the traditional IRA.
Note that QCD donor is not entitled to a charitable contribution deduction for the QCD. However, the QCD does not count as taxable income for the donor. If the QCD owner has reached his or her RBD, the QCD counted as part or all of the of the donor’s RMD will then lower the traditional IRA owner’s adjusted gross income (AGI) and AGI-based Medicare Part B monthly premiums. QCD donors can potentially benefit from these tax savings and Medicare Part B monthly premium reduction even if they do not itemize and instead take the standard deduction.
TSP participants should note that QCDs cannot be made from their traditional TSP accounts. Those retired TSP participants who have reached their TSP RBD and want to minimize their TSP RMD may want to consider transferring a portion of their traditional TSP to a traditional IRA and then use the traditional IRAs to make their QCDs. In so doing, they will indirectly lower the amount of their TSP RMD.
Donor-Advised Funds (DAFs)
A donor-advised fund or DAF is an account in which an individual (the “donor”) deposits financial assets into an account. The account is used to make donations to qualified charities (the “donee”) over time. The donor is eligible to receive a charitable contribution tax deduction for making contributions to the DAF. A sponsoring organization manages the account. The donor may recommend to the sponsoring organization how to invest the assets, and which qualified charities to donate the assets. Technically, once any financial assets are deposited into a DNF, the sponsoring organization has legal control over them. But as long as the donee is a qualified charity that is recognized by the IRS as a charitable organization, the sponsoring organization will usually use the donor’s charities of choice.
In addition to providing financial support to charities, DNFs can provide current income tax deductions (as charitable contributions) for donors who itemize on their federal income tax returns. Depending on the supporting organization and account type a donor chooses, the donor’s initial contribution to the DAF can range from $0 to $250,000. The financial assets that are eligible to be donated to a DNF include:
- Stocks, bonds, and open-ended funds;
- Money in IRAs and retirement plans;
- Private company stock;
- Cryptocurrencies; and
- Life insurance policies.
Before embarking on any of these opportunities for current 2021 tax-saving opportunities resulting from charitable giving, individuals are encouraged to speak with a qualified tax advisor to answer any questions they may have, as well as to find out which of these opportunities will best serve their 2021 tax needs.
New Tax Rules for 2021 – Charitable Giving
Edward A. Zurndorfer is a Certified Financial Planner, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street – Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While the employees of Serving Those Who Serve are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.