In part one of a two-part series on year-end giving on the Grow Your Giving podcast, Greater Horizons Vice President and Corporate Counsel Corey Ziegler recently shared five strategies to consider for tax-efficient charitable giving in the last few weeks of the year. Corey discussed the following topics:
- The CARES Act
- IRA Qualified Charitable Distributions
- Bunching Donations in a Donor-Advised Fund
- Donating Complex Assets
- Donate and Replace
You can listen to Corey’s thoughts online, on Apple Podcasts, Spotify, and Google Podcasts. A transcription of this episode can be found below.
Part two of this series focuses on incorporating charitable giving into your family’s holiday plans. Find all the details on part two here.
All episodes of the Grow Your Giving podcast can be found at greaterhorizons.org/podcast.
Authored by: Ashley Hawkins, Content Specialist
Welcome to the Grow Your Giving podcast, powered by the Greater Kansas City Community Foundation and our national entity, Greater Horizons. We aim to make giving convenient and efficient for our donors through donor-advised funds and other charitable giving tools. The Grow Your Giving podcast discusses philanthropic topics to help you enjoy giving more. Find us online at greaterhorizons.org.
Hi, I’m Corey Ziegler, your host for today’s episode of the Grow Your Giving podcast. In my role as Vice President and Corporate Counsel for the Greater Kansas City Community Foundation and our national entity, Greater Horizons, I oversee all the legal responsibilities of our organization, as well as help donors and professional advisors with complex charitable gifts so they can make the most of their giving. I primarily work with donors through donor-advised funds. Those are charitable giving accounts where a donor can gift assets to the fund at any time and receive a tax deduction. The fund is invested while assets are in the fund, either in investment pools that we offer or through the donor’s own financial advisor. And then the donor can enjoy granting to charities of their choice at any time, in any amounts over any period of time that they like. It’s a really efficient way to give. And you’ll hear me talk about donor-advised funds a few times in this podcast, so I wanted to make sure to introduce those to you. But of course, there’s information on our website at greaterhorizons.org, should you want to learn more about donor-advised funds.
This is part one of a two-part series focused on year-end giving. As we near the end of what has been a very interesting year, our staff remains busier than ever receiving contributions to our donor’s charitable funds and processing grants to nonprofits all across the country, all while setting up brand new funds so donors who are just getting started on their giving journey can complete their holiday giving that is more important than ever this year. Today, I’m going to focus on a handful of tax strategies for year-end giving. Be sure to listen to part two of this series for a conversation featuring my colleagues, Whitney Hosty and Gwen Wurst. They discuss how to incorporate charitable giving into your holiday plans as a family, teaching younger generations about the importance of giving back, and what traditions they have within their own families.
But let’s get started. We’re going to talk about five different tax-efficient giving strategies that you can use to give to charities in a tax-efficient way. I’ll be giving an overview of each of these, and you can find more details and visual aids for each topic on our website, greaterhorizons.org. So let’s start with the CARES Act, and I know many of you have heard about that this year. It is the coronavirus aid relief and economic security act that was passed in March. The largest economic stimulus package in U.S. history. Luckily, the act did contain some charitable giving incentives that I’m going to cover here briefly. But something to keep in mind with the act, if you’re trying to qualify for the incentives, the giving incentives under the act do consider three things. First, the type of donor. Do you itemize your deductions or do you take the standard deduction?
Second, the type of donation. Are you making a cash donation to a charity or are you giving other assets, like publicly traded securities? And then finally, the type of charity. Is the charity a qualified charitable organization under the definitions in the act that you can then qualify for these incentives, or is it another type of charity? And I’m going to get into that in just a second. The qualified charitable contributions under the act that qualify for the incentives that I will tell you about really have a few key points. First of all, they are only cash contributions. You want to make sure you’re giving cash to these organizations. And I should preface all of this with, the real reason for these charitable giving incentives was to encourage quick contributions to charities that are on the ground, focused on COVID-19 and providing services to the most vulnerable populations, really trying to get money out into the community and working right away.
So the IRS is looking at cash contributions for these incentives, and they also need to go to certain types of charities. Those include religious organizations, so churches and synagogues, it could be educational institutions, your alma mater, private schools, public schools, K through 12, college universities, pre-K, all of that would also qualify. Gifts to governmental entities for a public purpose. That would be like giving to a city for a public park, or maybe it’s something on the public health department side, all sorts of things that benefit the public through a governmental unit would also qualify. Most public charities qualify, and public charities are a lot of the charities I’m sure that you give to already. So these publicly supported organizations, like the American Heart Association, or your local museums, or children’s hospitals, those types of organizations typically will qualify as qualified charitable organizations under the act. I’m going to talk about a couple of exceptions in just a moment.
And then finally, private operating foundations. Those would be foundations that are set up by an individual or their family, and rather than making just grants to other charities, they’re actually operating programs and providing charitable services in the community. Those also qualify for these incentives. What does not qualify? Again, I mentioned any non-cash gifts. So that’s the first hurdle, has to be cash. But then cash contributions that are going to these three types of organizations do not qualify. First, unfortunately for the work that we do, donor-advised funds. The second would be private non-operating foundations. And that means private foundations set up by a family that’s just giving money to other charities. They are grantmaking foundations, similar to donor-advised funds. And then supporting organizations. And those are organizations that are maybe potentially set up by an individual family that is closely tied with a public charity, and they really just support that public charity.
All three of these types of organizations allow for deferred giving. The donors can contribute to the entity, but the entity itself does not have to make grants out to charities right away. And that’s really the reason that they are excluded from these rules. So there is some good news for those who might be working with the Community Foundation or with Greater Horizons. We do offer funds, like designated funds, which are just to benefit one particular charity over time, or scholarship funds, where you might be awarding scholarships to students to attend college. Those types of funds are not donor-advised funds, so you could use some of these incentives to give to those types of funds.
Let’s jump into the first incentive, and this is one that’s actually not just for this year, it’s for future years as well. And it is for those individuals who take the standard deduction on their income tax return. Normally if you’re taking the standard deduction, you do not have the ability to deduct your charitable contributions. This incentive is a $300 deduction that you can take for cash contributions to qualified charitable organizations. And that $300 is called an above the line deduction. It’s used to calculate your adjusted gross income or AGI. So it is a nice incentive for those who would not normally be given an incentive to deduct charitable contributions on their tax return. And this is actually probably something I would think more folks will be using. The standard deduction did increase back in 2017 under the Tax Cuts and Jobs Act where now, currently for 2020, the standard deduction for a married couple under age 65 that files jointly is $24,800. And for an individual, it’s $12,400.
So that’s a really high threshold to go over if you’re going to want to be able to, or be able at all, to deduct your charitable contributions. So this is a nice incentive because a lot of people are taking that standard deduction, but now they have a small incentive to give a little bit more and actually get to deduct some of that on the tax return. We would love to see that $300 be a larger amount, and maybe someday it will. But for now, this is a deduction that’s available to anybody that takes the standard deduction, and it continues not just this year, but for future years. The next incentive, actually the next two incentives, are only for 2020. So listen up because this is a big one. The individuals who itemize their deductions, and that means you’re not taking the standard deduction, you can donate cash to these qualified charitable organizations and deduct up to 100% of your adjusted gross income in 2020.
So you can essentially wipe out taxes for 2020. If you give up to that 100% AGI limit. Previously that limit was 60%, and then next year it’s scheduled to go back to that 60%. So this is a one-time option, at least until the law changes, if it would, to allow for cash contributions to these qualified charitable organizations at that higher amount, which is really great for those that are super generous and able to do that. The next incentive is to make those companies feel like they’re not left out in the cold. Corporations also get an enhanced deduction this year. They can deduct up to 25% of their corporate taxable income for cash contributions to those charitable organizations. That used to be 10% last year.
So the goal, and really the hope, is that we see more donors giving to charity this year, and that’s what these incentives were really designed to do. We’ve seen our donors giving more earlier in the year and more amounts this year than in years past. We’re exceeding our trend compared to last year at this point for gifts coming into funds, which is just a really great thing to see considering the challenges that charities are facing this year and many individuals around the country are facing. So really, really promising and hopeful that we’re going to see donors really taking advantage of these enhanced deductions for this year. If you’re generous enough that you exceed how much you can deduct on your tax return, you can actually carry forward your deductions for an additional five years after the year of the gift. So just keep that in mind, you don’t lose it, you get to carry it forward. But it would be carried forward in subject to the pre-2020 AGI limits. So the 60% cash to donation AGI limit would apply in future years.
So aside from the CARES Act, there are several other giving strategies that we see donors using that don’t just happen because of 2020. And I thought it might be good to walk through those really quickly, because there are some things that you might not be aware of that could be good to consider between now and year-end. The first is the IRA qualified charitable distribution. For those of you who are 70 and a half or older and have an IRA, you can donate up to $100,000 of your IRA each year to a qualified charitable organization. Basically similar to the organizations we talked about before. Donor-advised funds are not included, but we would be able to accept an IRA qualified charitable distribution into a designated fund or scholarship fund.
The beauty of this is the $100,000, or any amount below that that you take from your IRA and give to charity, is not reportable as income to you in the year that you do this. That’s a great benefit. You don’t get to take a charitable deduction because it’s kind of like you’ve never touched the cash. But when that money goes to the charity, you’ve gotten that money out of your IRA, it would satisfy a required minimum distribution from your IRA if a year required a distribution. Under the CARES Act in 2020, they did suspend RMDs for this year so you don’t have to do this. But if you’re charitable and you don’t need some of this money that’s in your IRA, and you want to reduce your portfolio that will be subject to RMDs in years ahead, this is a really great way to give to charity in a tax-efficient way.
I should note that the SECURE Act, which is another act that came out this year, sort of overshadowed by the CARES Act at this point, but the SECURE Act did change the RMD age to 72, while these RA qualified charitable distribution rules did stay at 70 and a half. So those of you who are at that 70 and a half age or older, you’ve got some options and certainly can use your IRA for charitable giving if that makes sense in your world. We do see a lot of donors who are utilizing this and really enjoying those tax benefits.
The next concept is actually something that became more popular after the 2017 Tax Cuts and Jobs Act when the standard deduction increased. And this concept is called bunching of donations, is what we call it. You might hear clumping or other terms that we’ve heard thrown around. But the bunching of donations is really a concept that donors who are giving smaller amounts to charities for potentially each year might consider pulling those donations and bunching those donations into one year to get above the standard deduction. And let’s talk about how this works. So let’s assume you have a married couple who’s filing jointly, they’re under age 65, so they have that $24,800 standard deduction amount that they would normally be subject to. In this case, they give $5,000 a year to charity. They also have an $8,000 mortgage and state and local taxes that they can deduct up to $10,000.
So when you add that together, the $10,000 state and local taxes, the mortgage interest of $8,000 and the charitable donation typically of $5,000, that gets you to $23,000. So they’re actually under the standard deduction and not really able to itemize those donations in those deductions. So this couple would, instead of doing $5,000 in one year, they would actually take three years worth of donations and make that a $15,000 donation this year. That would bump them over the standard deduction amount so that they could take the enhanced itemized deduction. But then they might not give to charity for the next couple of years because they’ve sort of front-loaded their donations this year. It’s good for the donor because they’ve gotten a nice tax benefit. But unfortunately for the charities that they support, it might be a bit of a budgeting challenge. They might know that they’re going to get a nice donation from a donor this year, but then they might not hear from that donor for a couple of years.
And that can be challenging for charities who are just trying to figure out how to operate from year to year. So we do encourage donors to consider a donor-advised fund as a way to bunch their donations and consistently support the charities they care about. In that case, they can take that $5,000 normal donation they would make to their charity each year and make a grant from their fund of that amount. So they put $15,000 in, in year one, and that year they make a $5,000 grant to the charity. The next year they make another $5,000, and the third year they make another 5,000. And hopefully, the fund is growing in the meantime because of investments and they’re able to give away even more. But the nice thing about that is they’ve enhanced their deduction in year one by taking the itemized deductions, but they’ve also given consistently to a charity in a way that’s helpful to the charity.
There’s a really nice chart on our website at greaterhorizons.org, should you want to look at this in more detail. But let’s move on to something that I know many of you already know about and have probably done yourself. It’s basically the idea of donating appreciated assets instead of cash. We all know donating cash is a simple way to give to charity. You write a check or you even use a donor-advised fund to make a grant. But it’s an easy way to give to the charity. You know what you’re going to deduct because it’s the amount of the cash, you’ve got your income tax savings from the charitable deduction if you’re taking your itemized deductions. But the one additional benefit, if you would instead give appreciated assets, like stock, would be the avoidance of long-term capital gains.
And why does that happen? Well, if you have appreciated stock, and let’s say you bought stock at $5,000 and now it’s worth $25,000, and you give that stock to charity, the charity sells the stock to generate cash to then use for their operations, and that sale of that stock is normally a capital gain to the owner of the stock, but the charity does not pay income taxes. So the charity does not pay capital gains tax, nor do you because you’ve given that stock away. So while you get the same tax deduction for gifts of cash and gifts of appreciated stock, you have the added benefit of avoiding long-term capital gains when you give appreciated assets to charity. And long-term capital gains means that you’ve owned the asset for more than a year prior to the gift. It’s a really nice way to enhance some of the tax benefits and increase your tax savings by giving appreciated assets.
So some examples that you might think about, obviously publicly traded securities is an easy one. But we have seen donors give all sorts of different types of assets. In fact, 18% of our total contributions last year were gifts of illiquid more complex assets. It’s a growing area of donations. And so, be creative as you’re looking at your assets and considering what you want to do for charity. For example, if you own a business and you might be selling the business, or it might be merging or doing something in the near future, and you want to carve out a piece of that business for charity before the transaction takes place, then giving shares of your privately held company, or membership interest in an LLC, or partnership interests in your partnership, all of that can be done prior to the transaction, and the charity can then sell that interest, and in most cases avoid gain on the sale.
So it’s a nice way to use an illiquid asset, your business interests, and turn it into liquidity for charitable giving. Real estate is another great example. Either personal residence, or commercial property, or in farmland, undeveloped property, all of that could be something a charity might be interested in receiving. Typically they would then sell the property and generate cash for their operations. Or in our case, we generate cash for your donor-advised fund. Some other assets that you might consider that actually are very good tax-efficient assets and most easily donated to charity, and those are retirement plans. A retirement plan, like a 401K, IRA, can name a charity as the beneficiary at your death. And by doing that, the charity does not pay income taxes when they take the money out of the plan.
So you’ve actually given them a much better asset than if you had, let’s say made a life insurance policy payable to a charity. Life insurance proceeds are not taxable as income, and so whether you give that to your family or charity, there are no taxes due. But if you gave a retirement plan to your family, they would pay income tax as they take the money out, whereas the charity doesn’t. So good things think about with your tax advisors about which assets really could make the best charitable gifts from a tax perspective. One final note on appreciated assets that I will mention would be tangible personal property. Be careful when you’re looking at items that you might have around the house that you want to give to charity and take a fair market value deduction for. You want to find a charity that’s going to actually use that property for its own charitable purpose.
The best example would be giving a piece of artwork to a museum where they actually display that artwork. You’re going to be able to deduct the full fair market value of that artwork. But if you had given it, let’s say to the Community Foundation and we sell it to generate cash for your fund, your deduction would be limited to your basis in that property, which is typically what you paid for that property. So not as great a tax result. So just be careful when you’re looking at those types of assets, and your tax advisor, I’m sure can help you with that. Finally, we’re going to talk about one strategy we’ve heard some donors using in their giving, and this is the strategy called donate and replace. And this would be someone who has a portfolio of publicly traded shares and let’s say they also have some cash that they would normally give to charity.
They want to maintain their portfolio, the same number of shares in the company, but they also want to give it to charity in a tax-efficient way. So one idea is to donate some appreciated shares to charity or to a donor-advised fund, but then at the same time, take cash and buy new shares in the company at what is presumably a higher fair market value at that time than when they first purchased the shares, let’s say many years ago. In this scenario, you can, first of all, avoid some capital gains by donating those shares the charity then sells. But then you also are purchasing new shares at a higher value, which means you have reduced your unrealized capital gains in your portfolio because you’ve got a cost basis for those shares that are higher than what it was before, even though the fair market value is now the same amount as it was just before the gift.
So it’s a nice way to maintain your portfolio, give assets away that would otherwise generate long-term capital gain for you if you sold them, and then also reduce your future tax liability in that portfolio. Again, there’s a great illustration of this on our website. It’s a little tough, I know, to understand these and then visualize this without seeing a picture. So I highly encourage you to check that out on our website. Our staff answers questions about these strategies day in and day out. This is our busiest time of year, in fact. And so if you have any questions, please don’t hesitate to give us a call. We want to help you make the most strategic and tax-efficient decisions. We’ll be available through the end of the year to process any gifts into charitable funds and work as quickly as possible to get grants out the door and to the nonprofits that need them now more than ever.
If you’re listening but don’t have a charitable fund set up yet, contact us and we’ll help you get started. We set up charitable funds for donors all across the country. Learn more and get started at greaterhorizons.org.
To hear more from the Grow Your Giving podcast, visit us online at greaterhorizons.org/podcast. Thank you for listening.