It’s nearly impossible to overstate the life-altering consequences of the COVID-19 pandemic. Add to that this year’s economic decline, social unrest, and extreme weather, and 2020 is undoubtedly the most volatile year of the 21st century to date.
But there’s also been an unprecedented outpouring of generosity from individuals who have stepped up their charitable giving in response to this challenging environment. If you’re looking to do the same, here’s why the remaining days of 2020 are a particularly good time to give—and how to maximize your support.
1. The stock market is near historic highs
The S&P 500 has nearly tripled over the past decade, creating significant gains for many investors. In such cases, there are two ways you might use those gains to further your charitable goals:
- Donate appreciated assets: One great way to support the causes you care about and reduce your tax bill is to donate appreciated assets to a qualified charity. Doing so allows you to potentially eliminate the capital gains tax you might otherwise owe on the assets, as well as donate the full market value of the gift. Conversely, if you sold the assets first and then donated the proceeds, not only would you would be on the hook for paying taxes on your gains, but you’d also reduce the overall amount of your gift if you paid those taxes from your proceeds.
That said, not all public charities are equipped to receive and liquidate gifts of securities and other assets, in which case it might be beneficial to first open a donor-advised fund (DAF) account. Contributions of appreciated assets to such accounts allow you to claim a current year tax deduction equal to the fair market value at the time of the gift—and to donate via the fund to qualified charities of your choosing anytime you like. When you’re ready to recommend a grant to a charity using the assets in your account, the donor-advised fund will handle transfer of money to the organization on your behalf or anonymously.
- Make a qualified charitable distribution (QCD): Because of the stock market’s decade of outsized gains, retirees may find that their portfolio values have exceeded what they think they’ll need in retirement—so much so that their annual are pushing them into a higher tax bracket. In such cases, a QCD of up to $100,000 per year from an individual retirement account (IRA) can be a great solution. This is still true in 2020, when IRA RMDs have been waived.
Like a typical portfolio withdrawal, a QCD counts toward satisfying any RMD requirements for the year. Unlike a typical portfolio withdrawal, a QCD is not counted as taxable income because it’s made directly to charity. And even though you don’t get a tax deduction from a QCD, it can still be a tax-efficient way to give—since the alternative is to take a taxable distribution, which could affect the taxability of Social Security and Medicare even if you claim a charitable deduction.
2. 2020 CARES Act tax incentives for charitable giving are expiring
The Coronavirus Aid, Relief, and Economic Security (CARES) Act offers tax incentives for giving that, unless extended by Congress, will expire at the end of 2020. Specifically:
- For those who take the standard deduction: You can take a one-time, above-the-line deduction of up to $300 for cash contributions made directly to qualified charitable organizations in 2020. Once this provision goes away, charitable donations will be deductible only if you itemize.
- For those who itemize their deductions: You can deduct up to 100% of your adjusted gross income (AGI) for cash donations made directly to qualified charitable organizations* in 2020. Once this provision goes away, the maximum will revert to 60% of AGI.
Be aware that to qualify for either deduction, the gifts must be made directly to qualified charities, not via a donor-advised fund or other pass-through method.
3. Existing tax laws continue to encourage giving
The charitable deduction was one of the few deductions that was not eliminated or capped as part of tax reform efforts a few years ago. On top of expiring incentives, existing laws allow donors to offset a significant portion of their income with certain charitable deductions:
- Cash donations: Up to 60% of AGI can be deducted for contributions of cash, including those made to DAFs.
- Non-cash donations: Up to 30% of AGI can be deducted for contributions of non-cash assets (such as real estate or securities) held more than one year, including those made to DAFs
- Blended donations: Up to 50% of AGI can be deducted for blended contributions of cash and non-cash assets.
Donors wishing to give in excess of these limits may carry over any excess deductions for up to five years.
4. Future tax law is uncertain
While extraordinary needs will persist into 2021, future tax reform efforts could alter the tax benefits of charitable giving. These two strategies can help lock in the tax benefits of giving this year:
- Carry over excess deductions: As mentioned above, if you’re able to give beyond the deduction limits for cash, non-cash assets, or a combination of both, you can carry over the excess deduction for up to five years. This is especially advantageous if you’re worried that the deduction limits may change in the future.
- Bunch contributions: One way to take full advantage of the tax benefits with charitable giving is to . For example, if you and your spouse typically donate $10,000 a year and have $10,000 in other deductions, your total deductions would be less than the standard deduction of $24,800 for 2020, meaning you wouldn’t want to itemize them. If you were to consolidate two years’ worth of charitable gifts into a single tax year, however, you would have $20,000 in donations and $10,000 in other deductions, pushing you past the standard deduction and allowing you to deduct the full value of your gifts.
If you have questions about any of the strategies mentioned above, be sure to consult a tax advisor before taking action.
Qualified charitable organizations exclude private foundations and donor-advised funds.
Resources for donors: Where to turn for help with maximizing your charitable impact.
If you need assistance identifying reputable charities or optimizing your giving, consider these resources from Schwab Charitable:
- A roundup of charities recommended for COVID-19 relief by the Center for Disaster Philanthropy.
- A search tool for identifying community foundation-sponsored COVID-19 funds across the U.S.
- Resources from leaders in the philanthropic sector to identify causes and charities supporting COVID-19 relief and equal access to justice initiatives.
- Schwab Charitable’s Giving with Impact podcast, where leading voices from across the charitable ecosystem engage in conversations about achieving more effective philanthropy.