Federal tax benefits for the charitably inclined have undergone a seismic shift over the past three years. Between the Tax Cuts and Jobs Act of 2017, the SECURE Act of 2019 and the three acts passed this year collectively known as the CARES Act, the federal government has not only changed the rules, but also built in some traps for the unwary.
The choices are more complex, but there is an optimal tax-deduction strategy that can be followed this year depending on your age and tax status.
The background: Because of the limits placed on state and local income and property tax deductibility starting in 2018, many taxpayers found themselves unable to itemize deductions, consequently eliminating a sizable portion of charitable contributions that had previously been deductible. As a result, the alternative of bunching multiple-year contributions through donor-advised funds has become popular. Many retirees over age 70 1/2 also turned to their IRAs, converting their required minimum distributions (RMDs) into qualified charitable deductions (QCDs) for their charitable donations (see “How seniors can still get charitable tax deductions” in the Feb. 13, 2019, issue of the Town Crier).
This approach eliminated the taxes that would ordinarily have been owed on the RMDs, effectively providing the equivalent of a charitable tax deduction. The CARES Act added another wrinkle by allowing a deduction for up to $300 of charitable donations for taxpayers unable to itemize deductions.
Which of the above choices is the best strategy to follow?
All taxpayers taking the standard deduction should take advantage of the “above-the-line” $300 deduction in 2020 for your first $300 of charitable contributions made in cash. Not only will that reduce your taxes, it also will reduce your adjusted gross income, which, if you’re a senior, could lower your Medicare premiums and Social Security taxability.
If you plan to contribute more than $300, the most efficient way to do it depends on your situation. For retirees over age 70 1/2, QCDs taken from IRAs remains the second-best way to ensure every dollar you give away – up to $100,000 – results in a full tax deduction. However, an anti-abuse provision in the SECURE Act prevents seniors who are still working from getting the full deduction for QCDs.
If you continue to contribute to your IRA past age 70 1/2, you are prohibited from taking any QCDs until the RMDs you’ve taken exceed all your post-70 1/2 contributions.
But there is a workaround if you’re married. Because IRA accounts are individually owned, you can contribute to one spouse’s IRA while taking QCDs from the other spouse’s IRA. Although you may be giving up an additional $7,000 deduction for your spouse, it’s still the second-best way to get a full charitable tax deduction.
If you are younger than 70 1/2, using a donor-advised fund to bunch contributions – and consequently itemize deductions – every few years is the third-best way to get at least a partial tax deduction. If you donate highly appreciated stock rather than cash, the tax benefit is even greater.
If you are a very high-net-worth family, there are more complex techniques involving charitable trusts and even family foundations that might be even more tax-beneficial, depending on your charitable goals and situation. Suffice it to say that despite the new complexities, there are still ways of getting a tax break for charitable giving.