Chances are, between basting the turkey and watching the football during the holidays, you’ll find yourself giving to the causes and organizations you believe in. In the U.S., 30% of the year’s charitable giving is done in December, and 10% of the annual giving is just in those last three days of the year!
The statistics show that the holidays aren’t just a time of receiving but giving as well.
From the most complex nonprofit donations to the bell-ringer at the grocery store, generosity is in the air. But in 2020, the air is different, no question.
This year has been complex financially for most of us, yet charitable giving remains a priority in the lives of many Americans – perhaps even more so in a stressful, reflective time like this. Some indicators show that giving has actually increased.
Like everything this year, even charitable giving is complicated. Let’s look at some specific planning strategies for giving to charity for the holidays in 2020.
Unique Charitable Giving Planning for 2020
A veritable cascade of government economic policies in the last year have moved some of the financial coordinates, which also affects charitable giving. A few specifics bear mentioning.
The RMD – QCD Connection
One of the most efficient, low maintenance ways to make a donation is transferring your Required Minimum Distribution (RMD) to a Qualified Charitable Donation (QCD). This makes your mandatory withdrawal into a charitable gift, affording you the chance to give while reducing your tax footprint.
The CARES Act has put RMDs on hold this year as part of the economic relief package, but this doesn’t mean you can’t make these distributions. If you’re still wanting to donate to your favorite cause or organization, the tax relief is still available to you even though the distribution is no longer mandated.
For many givers, there’s more to the interaction than a tax break, and so this option is still available. And while giving looks to have gone up this year overall, smaller charities like smaller businesses, are hard hit. If the local or niche charity is close to your heart, this is probably when they need help, RMDs or not.
AGI – 100% Deduction
The CARES Act also made provisions for the high-net-worth givers who are able to donate their entire adjusted gross income (AGI) for the year. In years past, 60% of your donated AGI was tax-deductible, but this year it is 100%.
The CARES Act made this 2020 provision in an effort to get relief money to nonprofits right away, rather than having it waiting in a trust or other vehicle. Donors with the means to contribute their income for the year receive a large tax deduction they can use in other places in their portfolio.
This deduction, which can be substantial, can help you cover the cost of a Roth conversion, moving funds from a traditional IRA to the Roth model. That cost, now covered, can be a sticking point for many investors. This strategy offers the advantages of a Roth – namely, lowering your taxes down the road – with an opportunity to “zero-sum” the conversion cost with the giving you’re already doing.
Other Considerations for Year-End Charitable Giving
There are other charitable giving strategies that are important to have in place by the end of the year. Although these strategies are available every year, 2020 may be a time you’re particularly motivated to make an impact on your favorite causes. Now is a good time to reevaluate how you can provide financial help.
The DAF is an important tool for a tax-smart philanthropy plan. You could almost call it a time machine – you contribute the money now and take the tax benefit now, but you don’t have to choose the distribution recipients or schedule right away.
This can be especially helpful in a “bumper year” in which you may have sold a business or received an inheritance, for example. Placing money in a DAF can reduce your tax footprint for that year, and you can distribute the money in the future to the causes and organizations you support.
Life insurance can be a way to leave considerably more to a charity than if you made a straight donation. For example, instead of donating $100,000 to a nonprofit, an investor buys a single premium whole life insurance policy for that much and donates it to the organization. If the investor was a healthy 50-year-old at the time, when he/she dies, the policy could pay out more than $250,000 to the nonprofit.
In the meantime, when you buy life insurance and contribute it to charity, you receive a tax deduction for the cash value of the policy. You also receive tax benefits on any subsequent premiums you pay after the initial gift.
To receive the immediate tax benefit, you have to irrevocably donate the policy to the nonprofit. You can also make the charity a revocable beneficiary, which would reduce the tax liability of your estate when you die and the policy is paid out.
The Tax Cuts and Jobs Act set the minimum standard deduction at $24,400 for 2020, which means many taxpayers have stopped itemizing their returns. Bunching donations is one strategy to get you above the threshold for better tax treatment.
Instead of your yearly gift, bunching takes gifts for the next few years and puts them in one year. So instead of giving $15,000 annually over three years, you give $45,000 at once. This strategy puts you in better tax territory for 2020.
From the vantage point of a struggling nonprofit, a larger gift might be what they need at the moment, especially if 2020 has been hard on their fundraising. If you have the means, you can help them through a rough spot while improving your tax efficiency.
A Celebration of Giving
The holidays, like everything else in 2020, will look different this year. To keep your loved ones and your community safe, you might gather with only your immediate family, cancel travel plans and socialize online.
But the tradition and spirit of giving to charity for the holidays can still flourish as a meaningful way to celebrate the season. Continuing to give can help us to “normalize” this disorienting year and connect ourselves with each other and the greater world.
As your financial planning team, we wish you and yours the best in this sacred season! Let’s check in to talk through how you can optimize giving and tax efficiency for a year like no other.
This is not intended to provide specific legal, tax or other professional advice. For a comprehensive review of your personal situation, always consult with a tax and legal advisor.