As we enter the fall season, many of us begin to think about year-end tax planning matters. There are a number of things we can do now to reduce our 2021 income tax bills due by next April 15. Charitable giving plays an important role in this planning: It allows us to positively impact our community, while at the same time achieving a tax-savings benefit.
For those of us who itemize our income tax deductions, the normal rule is that deductions of charitable gifts are limited to 60% of AGI. The CARES Act, passed in 2020 but extended through the end of 2021, has temporarily suspended that AGI limitation. Specifically, through the end of this year, cash gifts to charity may be deducted up to 100% of AGI. That means that those of us who itemize our deductions may now give more to charity before reaching our AGI limitation. Also, any giving beyond the AGI limitation may be carried forward and applied over the next five years.
Gifts to Donor-Advised Funds
Some of us may want to take advantage of a large charitable income tax deduction this year without having to pay those funds out to our favorite charities right away. One way to do that is to front-load a gift to a donor-advised fund (DAF) this year. A front-loaded gift to the DAF will qualify for a 2021 income tax deduction, and we can then use the DAF over the next several years to more thoughtfully make gifts to our favorite charities over time.
Gifts of Appreciated Securities
With the recent run-up in the stock market, many of us now find ourselves with appreciated securities in our investment portfolios. Rather than sell those stocks now, incur a capital gain, and then gift the sales proceeds to charity, the better approach is to give some of those appreciated securities directly to charity. Doing that allows for an immediate income tax charitable deduction, while avoiding the capital gain entirely.
IRA Charitable Rollover
Those of us who are age 70-1/2 or older can make gifts to charity directly from our IRAs. The so-called IRA Charitable Rollover allows us to direct up to $100,000 per year to be paid to one or more charities. None of the funds distributed are taxable to us as ordinary income, but those funds do count toward our required minimum distribution (RMD). This is a particularly smart strategy for those of us who take the standard deduction, and who would not otherwise achieve much income tax benefit from our charitable giving.
The end of the year is coming fast, and you should act now to take advantage of these tax-savings benefits before year end. Be sure to talk with your tax, investment, or legal advisors to see what makes most sense for you.