Ways to Maximize Charitable Giving Impact
One of the silver linings to come out of the pandemic is the surge of offers to support those most affected. According to Giving USA, charitable giving in the United States reached a record $471.44 billion in 2020, up 5.1% from 2019.1 As of June 2021, charitable giving was up 6.1% from of the previous 12 months.
As the season of giving approaches, consider these four ways to maximize the power of giving while minimizing your tax liability.
1. Instead of cash, give valuable non-cash assets
Generosity aside, the upward trend in charitable giving can also be traced to economic factors, including the growth of the S&P 500® Index. With the S&P 500 nearly doubling between 2016 and 2021, many investors have highly valued non-cash assets — such as publicly traded securities, stocks, real estate investments and private business interests — in their portfolios.
Before you sell your estimated non-cash assets to donate the proceeds, consider contributing funds instead. If you've held the funds for more than a year, your gift can grow in addition to your tax savings. Endowments generally eliminate the capital gains tax you may receive on their sale - allowing you to donate up to 20% more and thereby reduce your tax liability. Let's look at how this strategy works if you own XYZ stock with a current value of $50,000.
Donating shares in exchange for after-tax sales proceeds
Comparing how donating stock can potentially lead to increased gift amount and tax savings compared to donating after-tax sales proceeds.
This standard example is for illustrative purposes only. The example does not take into account any state or local taxes or Medicare net investment tax. The tax savings shown are the tax deduction, multiplied by the grantor's income tax rate (24% in this example), minus the long-term capital gains taxes paid.
If you decide to sell the XYZ stock, with an original cost basis of $5,000 and a capital gains tax rate of 15%, your charitable gift will be $43,250 after paying the long-term capital gains tax of $6,750 (($50,000 - $5,000) x 15% ) . Assuming your tax rate is 24%, your tax savings would be $3630 ($43250 x 24%) - $6750.
Instead, by donating XYZ stock, you'll pay no long-term capital gains tax, allowing you to earn the full value of the $50,000 - a tax savings of $12,000 ($50,000 x 24%). With this strategy, the charity will receive the $6,750 they would have owed in long-term capital gains tax—a win-win situation for both the charity and you.
2. Charitable Contribution Group
With the 2022 standard deduction limits expected to increase from current levels, 3 itemized deductions may be more trouble than they're worth. If your total itemized deductions are less than the standard deduction, you may benefit from combining two years of itemization into one.
For example, let's say you decide to pool your charitable contributions for 2021 and 2022, or combine them into one year (2021). You can then itemize the deductions on your 2021 tax return and take the standard deduction in 2022. In addition to achieving a significant charitable impact in 2021, this strategy can produce a larger deduction for two years than two separate years of itemized deductions, depending on your income level and tax filing status, yielding amounts each year.
Here's an example of how a married couple without children can claim an additional $8,200 in tax deductions by accumulating their annual contributions of $10,000 for both 2020 and 2021 on their 2020 tax return.
Taking a standard discount versus collective bidding
Taking standard deductions for both years, the total deduction is $49,900. By setting up one year and taking the standard deduction the following year, the two-year deduction totals $58,100, a difference of $8,200.
This standard example is for illustrative purposes only.
In this scenario, the couple averages $10,000 in charitable deductions and $13,000 in other deductions ($23,000 total) each year. With Option 1, spouses elect to receive the higher standard deduction amounts of $24,800 in 2020 and $25,100 in 2021 - for wk