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5 New Rules for Charitable Giving October 14, 2020

Posted by bradstreetblogger in : Charitable Giving, Deductions, Depreciation options, General, tax changes, Tax Planning Tips, Tax Rules, Tax Tip, Taxes, Taxes , add a comment

New tax laws and strategies can help you maximize tax breaks for yourself and benefits for the charity.

THERE ARE SO MANY reasons to make charitable gifts this year – whether it’s to support nonprofits that help people and communities with challenges from the coronavirus pandemic, or to provide assistance after disasters such as the Beirut explosion or an active hurricane season.

Even though a lot of people are struggling financially right now, many people whose finances have stabilized want to do whatever they can to help out. And they’re not waiting until the end of the year to make their gifts. “A lot of things are driving people to be generous, and our numbers prove it,” says Kim Laughton, president of Schwab Charitable, which runs Schwab’s donor-advised funds. From January through June 2020, its donors recommended over $1.7 billion in 330,000 grants, almost a 50% increase in the dollars granted and the number of grants compared to the same period in 2019. “There’s great need out there, and people are stepping up.”

“Philanthropy and giving is on everyone’s mind,” says Dien Yuen, who holds the Blunt-Nickel Professorship in Philanthropy at the American College of Financial Services. Some nonprofits need help now just to stay afloat. “The donors who are quite active are making gifts now and not waiting until later in the year, because the nonprofit might not be there later on.”

New tax laws and strategies can help you maximize tax breaks for yourself and the benefits for the charity. Here’s what you need to know:

New $300 Charitable Deduction for Non-Itemizers

The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, created several incentives for people to help charities right away, including a charitable deduction of up to $300 in 2020, even if you don’t itemize. Otherwise, you generally need to itemize to take the charitable deduction, which fewer people do since the standard deduction doubled a few years ago – now at $12,400 for single filers and $24,800 for married couples filing jointly in 2020.

“As a result of the Tax Cuts and Jobs Act of 2017, most taxpayers utilize the significantly higher standard deduction instead of itemizing deductions for mortgage interest, state taxes paid and charitable contributions,” says Mark Alaimo, a certified public accountant and certified financial planner in Lawrence, Massachusetts. “This special CARES Act provision now gives a tax incentive to all taxpayers to give at least $300 to charity during 2020.” To qualify, the gift must be made in cash and go directly to the charity, rather than to a donor-advised fund or private foundation.

“I think that the additional $300 provision in the CARES Act is really great, especially for the younger generation who may be just starting to work and may not be paying substantial mortgage interest,” says Kelsey Clair, tax strategist for Baird’s Private Wealth Management Group. “It allows them to give even in a small way and reap the tax benefit for it.”

The CARES Act also helps people who are in a financial position to make very large gifts. In 2020, you can deduct cash gifts of up to 100% of your adjusted gross income, rather than the usual 60% limit. To qualify for this higher limit, the gifts must go directly to the charities, rather than to a donor-advised fund or private foundation. This can help wealthy people reduce their taxable income significantly in 2020, and it may also help retirees who have money to give but bump up against the income limits for the deduction. “I see it in the older generation who have a lot of cash but don’t have a lot of income coming in and are trying to help out the community in any way they can,” says Clair.

Bunching Contributions and Donor-Advised Funds

Bunching contributions is a strategy that became popular after the standard deduction was increased. Instead of making smaller charitable contributions spread over several years, you can make larger contributions in one year so you can itemize your deductions (and claim the charitable deduction) that year, then take the standard deduction in the other years. “Rather than making a steady stream of charitable contributions from year to year, it may be beneficial instead to use a bunching strategy – give more and itemize in one year, and claim the standard deduction in other years,” says Clair.

Even though this can help you tax-wise, you might not want to give all of the money to the charities at one time and then neglect them over the next few years. But bunching can work well if you have a donor-advised fund. These funds are offered by brokerage firms, banks and community foundations, and you can take the charitable deduction in the year you give the money to the donor-advised fund, but then you have an unlimited amount of time to decide which charities to support. You can usually open a donor-advised fund with an initial contribution of $5,000 to $10,000 (it’s $5,000 at Schwab and Fidelity, $10,000 at T. Rowe Price, and $25,000 at Vanguard). You can make grants to charities of $50 or $100 up to thousands of dollars or more, and you can invest the money in a handful of mutual funds or investing pools until you make the grants. “It can be a great way to go ahead and make the contribution, without having to decide where that money goes right away,” says Clair.

Another benefit of the donor-advised fund is simplicity – you get one receipt for your tax records when you make the contribution and don’t have to wait for a variety of paperwork from each of the charities. “Donor-advised funds really help with the administrative side of things,” says Elliot Dole, a certified financial planner with Buckingham Strategic Wealth in St. Louis. “Itemizing charitable gifts is a hot button audit area. But with a donor-advised fund, it’s clear that you met the requirements.”

A Double Tax Break From Giving Appreciated Stock

Many people just write a check to the charity, but you may get a bigger tax benefit if you give appreciated stock. If you owned the stock for more than a year, you can deduct the value of the stock on the date you give it to the charity if you itemize. And even if you don’t itemize, you can avoid having to pay long-term capital gains taxes on your profits, which could have cost up to 20% if you sold the stock first. (Giving appreciated stock doesn’t qualify for the special $300 charitable deduction for non-itemizers for 2020; that only applies to cash.)

Most charities can accept appreciated stock, but the process can be easier if you have a donor-advised fund. “Given how volatile the stock market can be, many advisors recommend utilizing donor-advised funds due to the ease and speed that one can make a contribution,” says Alaimo. “This makes it easier to opportunistically gift highly appreciated securities, while regulating which charity receives how much of the donation, and when they receive it.”

It’s even easier if your brokerage account and donor-advised fund are with the same company. “When you log into your Schwab accounts, it shows your investment accounts, your bank accounts and your charitable account,” says Laughton. You can sort your investments by most highly appreciated or highly concentrated and see if you’re overweighted in one area. “We encourage people to rebalance their portfolios regularly, and when they see they’re overconcentrated, instead of selling those shares, they can just move them over to their charitable account,” says Laughton.

With so much stock market volatility this year, you may want to donate the stock when it reaches a target price, rather than giving at a certain time of year.

The donor-advised fund can also accept a variety of contributions – whether you write a check or you give appreciated stock, privately held stock, real estate, limited partnerships or even a horse farm. “It always makes sense for people who have highly appreciated non-cash assets to at least explore whether they could make good charitable gifts,” says Laughton. “Donor-advised funds can make that simple and easy.”

If you have investments that have lost value, however, it’s better to sell them first – and take a Charitable loss – and then give the cash to charity. “I’ve seen multiple times where people made mistakes of donating stocks that were in a loss,” says Clair. “It’s better to sell that and claim the loss on your return and donate the cash.” When you sell the losing stock, you can use the loss to offset your capital gains and can use up to $3,000 in losses to reduce your ordinary income, which you couldn’t do if you gave the stock directly to the charity.

Make a Tax-Free Transfer From Your IRA

People who are age 70½ and older can give up to $100,000 per year tax-free from their IRA to charity, a procedure called a qualified charitable distribution or QCD. The gift counts as their required minimum distribution but isn’t included in their adjusted gross income. (Even though the SECURE Act, another recent tax law, increased the age to start taking RMDs from 70½ to 72, you can still make a qualified charitable distribution any time after you turn age 70½.)

This is usually a great strategy for people who have to take RMDs and would like to give money to charity – they can help the charity and not have to pay taxes on the money they have to withdraw from their IRA. But because of the CARES Act, people are not required to take RMDs in 2020. However, you may still be able to benefit from making a QCD this year. “Some people who have been doing the QCD have been supporting a couple of charities every year, and they’re not going to stop, especially during this time of need,” says Yuen. The tax-free transfer takes money out of your IRA, which can help reduce future RMDs. “It’s great planning,” she says.

To keep the money out of your AGI, it must be transferred directly from your IRA to the charity – you can’t withdraw it first. Ask your IRA administrator about the procedure, and let the charity know the money is coming. You have to give this money directly to a charity; it can’t go to a donor-advised fund.

Make an Extra Effort to Research Charities This Year

Scam artists have been out in full force to take advantage of the coronavirus pandemic. It’s even more important now to check out charities before you give money, especially if they contact you first. You can look up charities at sites such as Charity Navigator and the Better Business Bureau’s Wise Giving Alliance. Local community foundations are also a great resource for aid focused on your community – see the Community Foundation Locator for links. If you have a donor-advised fund, you may have access to additional research tools, such as GuideStar.

Schwab Charitable can help its donors vet the charities and also provides lists of selected charities that focus on timely issues, such as COVID-19 relief and social justice. “We’re trying to develop short lists to help people narrow the charities down to ones we know are valid and doing good work,” says Laughton.

Credit given to US News & World Report published Aug 21, 2020 by Kimberly Lankford.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

–until next week.

Tax Tip of the Week | No. 358 | Five Things to Know About Substantiating Donations June 8, 2016

Posted by bradstreetblogger in : Charitable Giving, General, tax changes, Tax Preparation, Tax Tip, Taxes , add a comment

Tax Tip of the Week | June 8, 2016 | No. 358 | Five Things to Know About Substantiating Donations

There are virtually countless charitable organizations to which you might donate. You may choose to give cash or to contribute noncash items such as books, sporting goods, or computers or other tech gear. In either case, once you do the good deed, you owe it to yourself to properly claim a tax deduction.

No matter what you donate, you’ll need documentation. And precisely what you’ll need depends on the type and value of your donation. Here are five things to know:

1. Cash contributions of less than $250 are the easiest to substantiate. A canceled check or credit card statement is sufficient. Alternatively, you can obtain a receipt from the recipient organization showing its name, as well as the date, place and amount of the contribution. Bear in mind that unsubstantiated contributions aren’t deductible anymore. So you must have a receipt or bank record.

2. Noncash donations of less than $250 require a bit more. You’ll need a receipt from the charity. Plus, you typically must estimate a reasonable value for the donated item(s). Organizations that regularly accept noncash donations typically will provide you a form for doing so. Keep in mind that, for donations of clothing and household items to be deductible, the items generally must be in at least good condition.

3. Bigger cash donations mean more paperwork. If you donate $250 or more in cash, a cancelled check or credit card statement won’t be sufficient. You’ll need a contemporaneous written acknowledgment from the recipient organization that meets IRS guidelines.

Among other things, a contemporaneous written acknowledgment must be received on or before the earlier of the date you file your return for the year in which you made the donation or the due date (including an extension) for filing the return. In addition, it must include a disclosure of whether the charity provided anything in exchange. If it did, the organization must provide a description and good-faith estimate of the exchanged items or service. You can deduct only the difference between the amount donated and the value of the item or service.

4. Noncash donations valued at $250 or more and up to $5,000 require still more. You must get a contemporaneous written acknowledgment plus written evidence that supports the item’s acquisition date, cost and fair market value. The written acknowledgement also must include a description of the item.

5. Noncash donations valued at more than $5,000 are the most complicated. Generally, both a contemporaneous written acknowledgement and a qualified appraisal are required—unless the donation is publicly traded securities. In some cases additional requirements might apply, so be sure to contact us if you’ve made or are planning to make a substantial noncash donation. We can verify the documentation of any type of donation, but contributions of this size are particularly important to document properly.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.
Rick Prewitt – the guy behind TTW

…until next week.

Tax Tip of the Week | No. 356 | Charitable IRA Distributions May 25, 2016

Posted by bradstreetblogger in : Charitable Giving, Deductions, General, tax changes, Tax Planning Tips, Tax Tip, Taxes, Taxes , add a comment

Tax Tip of the Week | May 25, 2016 | No. 356 | Charitable IRA Distributions


As you probably know, a person must take a Required Minimum Distribution (RMD) from their IRA each year once they reach age 70.5.  For many years, there has been a special tax rule that allowed these individuals to contribute the RMD to a charity tax free. The problem in prior years, however, was that this rule was always one of those last minute changes Congress made to the tax code which never allowed time to do any planning.

Changes Congress made to tax code in late 2015 have made this charitable contribution provision “permanent”.  Now that we have some time to plan, let’s take a look at how this can be a very powerful tax planning tool.

First, what is a “qualifying charitable contribution”? The requirements are relatively simple. The charitable contribution must be:

1.    A distribution from an IRA
2.    A direct contribution from the IRA trustee to the charitable organization-with no intervening possession or ownership by the IRA holder
3.    Made by an IRA holder who has reached age 70.5
4.    Contributed to a 501(c)(3) organization, church or other “non-private foundation” or donor advised fund.

Let’s look at some examples:

Fred has reached age 70.5 and doesn’t really need the RMD to help pay his bills.  Fred also likes to make a donation to his church each year.  Fred has his house paid off and can no longer itemize his deductions.  If Fred does a charitable RMD to his church, he is not paying taxes on a distribution that he could not write off as a charitable contribution.  In all likelihood, Fred will also have less of his Social Security benefits be included in taxable income because he has eliminated that income from his AGI for the taxable Social Security equation.

Mary is 70.5, but can itemize her deductions due to some sizable medical bills.  She also likes to make a contribution to her alma mater each year.  By making a charitable RMD, she can make her AGI lower, therefore allowing more of her medical expenses to be deducted against the 7.5% AGI floor on medical deductions.

Rick and Diane are both 70.5 and would like to make a sizable donation to their favorite charity.  Each has their own IRA account.  They would like to donate $100,000 each this year. (The annual limit is $100,000 for a charitable RMD.)  If Rick and Diane do not use the charitable RMD rule, they would not be able to deduct the full charitable contribution this year due to the 50% AGI charitable limitation.

Also note that in all three of these examples, the taxpayers have kept the RMD off of their federal tax return which means they are not paying Ohio taxes on what otherwise would have been a taxable distribution.

If you are approaching, or have reached 70.5, give us a call to see how this powerful tax planning tool can be used to reduce your taxes.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.
Rick Prewitt – the guy behind TTW

…until next week.

Tax Tip of the Week | No. 315 | Make the Most of RMDs August 12, 2015

Posted by bradstreetblogger in : Charitable Giving, Deductions, General, Tax Planning Tips, Tax Preparation, Tax Tip, Taxes, Taxes , add a comment

Tax Tip of the Week | August 12, 2015 | No. 315 | Making the Most of RMDs

When a person reaches age 70.5, and they have an IRA account, they must start taking Required Minimum Distributions (RMD) annually.

If a retiree has sufficient assets and doesn’t need to spend the required minimum distributions from their retirement plans, they might be frustrated by being forced to take them and incur the associated tax liability. There are ways, however, that they can make lemonade from a lemon. Here are several ideas:

Buy life insurance: Life insurance provides a potential tax-free death benefit to heirs, and lets the retiree, through leverage, possibly give those heirs more than they would wind up with by inheriting what remains of the IRA. This option is particularly attractive for those whose beneficiaries are in a higher tax bracket than themselves.

Purchase long-term-care insurance: Long- term-care insurance can provide retiree’s a way to protect their assets should they need in-home or assisted nursing care. With the ever-growing cost of assisted living, it will be important for many people to have this coverage.

Fund a 529 plan: This can be a great way to leave a legacy for children or grandchildren. If the retiree has an RMD that is more than the IRS annual gifting limit, using 529 plans allows them to gift five times the annual gifting limit in one year. Keep in mind that strategy can only be used once every five years.

Make a charitable gift using a donor-advised fund: Charitably inclined retirees can use their unwanted RMDs to give money to their favorite charity through a donor-advised fund. A donor-advised fund allows them to make a tax-deductible (up to 50% of adjusted gross income) contribution to the fund. The fund managers then manage the assets and make distributions to your charity of choice. The investments grow tax free, offering the potential to give more over time.

Use the RMD to pay the tax due on a Roth conversion: Roth IRAs do not have an RMD requirement. Retirees can use their current unwanted RMD to pay the taxes due upon converting their traditional IRA to a Roth. The amount converted would be subject to ordinary income tax, but once it is converted there would no longer be an RMD requirement.

Re-invest: There are worse things you can do than simply to re-invest unneeded RMDs in taxable accounts. If they are invested in individual securities and held for the long term, taxation of gains on those assets (assuming they do indeed gain in value) can be deferred for a long time.

Give us a call to see what tax savings ideas might work for you!
You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.

Rick Prewitt – the guy behind TTW

…until next week.

Tax Tip of the Week | No. 228 | A Year-End Tip Worth Repeating December 11, 2013

Posted by bradstreetblogger in : Charitable Giving, Tax Planning Tips, Tax Tip, Taxes , 1 comment so far

Tax Tip of the Week | December 11, 2013 | No. 228 | A Year-End Tip Worth Repeating

Before Santa comes to visit, here is a year-end tax savings tip to consider:

Go through your house and garage and see what items you have not used in the last two years and donate them to charity.  You can clean out space for all the new toys that are coming and receive a tax deduction for it!

The IRS requires that these non-cash donations must be in “good condition or better”.  Furthermore, you can only deduct the Fair Market Value (FMV) of the items donated.  The Salvation Army’s web site provides a guide that you can use to determine the FMV.  You can view the guide by going to:  http://www.thetaxdude.com/uploads/Salvation_Army_Valuation_Guide_for_Donated_Items.pdfIf the FMV exceeds $500 you will need to complete Form 8283 as part of your tax return.  On this form you will need to list: name and address of the donee organization, date of the contribution, description of the items donated, FMV and the original cost of the items donated.

If you donate a car, or have non-cash contributions exceeding $5,000 give us a call to discuss the details.

We hope Santa is good to you this year while you take as many tax deductions as you can.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.
 
Rick Prewitt – the guy behind TTW

…until next week.