There are many ways to give to charity. You can make gifts during your lifetime or at your death. You can make gifts outright or use a trust. You can name a charity as a beneficiary in your will, or designate a charity as a beneficiary of your retirement plan or life insurance policy. Or, if your gift is substantial, you can establish a private foundation, community foundation, or donor-advised fund.
Cash donations are the easiest way to donate to charity. Cash donations to a public charity are deductible in full up to 100 percent of Adjusted Gross Income for 2021. If you do not itemize deductions, a $600 charitable deduction for direct cash gifts to public charities is available (in addition to the standard deduction).
Planning tip: If you plan to use the standard deduction, make sure to provide receipts for donations up to $600 to take advantage of the special charitable deduction in 2021.
Stock donations
Long-term capital gain property is property that would have produced a long-term capital gain if it had been sold rather than donated to charity. Remember, a gift to charity is not the same as a sale to charity. Capital gain is considered “long term capital gain” when property to which it applies has been held longer than 12 months.
When you donate long-term capital gain property to a public charity, your deduction is limited to 30 percent of your contribution base. The carryover rule applies. The full fair market value (FMV) of the asset is used to determine your charitable deduction.
Donor-advised fund
A donor-advised fund (DAF) offers an easy way for a donor to make significant charitable gifts over a long period of time. A DAF is similar to a private foundation but requires less money, time, legal assistance, and administration to establish and maintain. A DAF also enjoys greater tax advantages than a private foundation.
Technically, a DAF is an agreement between a donor and a charity that gives the donor the right to advise the charity on how a portion of the donor’s contributions to the charity will be distributed to other charities. Contributions may be tax deductible in the year they are paid to the DAF if they are structured so that they aren’t considered earmarked for a particular distributee. Though they may bear the donor’s name, these funds are not operated as separate entities, but are mere bookkeeping entries. They are components of the DAF. The DAF must own the funds and have ultimate control over distributions.
During life, a donor (or a donor’s designee) can make ongoing, nonbinding recommendations to the DAF as to how, when, and where grants from the fund should be made. Additionally, the donor can offer advice to the DAF regarding how contributions should be invested. The donor may suggest that, upon death, grants be made to charities named in his or her will or other legal instrument such as a revocable living trust. Or, the donor may designate a surviving family member(s) to recommend fund distributions. However, the fund is not obligated to follow any of the donor’s suggestions — hence the name “donor-advised fund.” As a practical matter, though, the DAF will generally follow a donor’s wishes. Grants to recipients are typically identified as being made from a specific donor’s account, but they can be made anonymously at the donor’s request.
A donor can generally take an immediate income tax deduction for charitable contributions of money or property to — or for the use of — a DAF if the donor itemizes deductions on his or her federal income tax return. The amount of the deduction depends on several factors, including the amount of the contribution, the type of property donated, and the donor’s adjusted gross income (AGI). Generally, deductions are limited to 50 percent of the donor’s AGI. For 2018 to 2025, the limit is increased to 60% for charitable contributions of cash to public charities. If the donor makes a gift of long-term capital gain property (such as appreciated stock that has been held for longer than one year), the deduction is limited to 30 percent of the donor’s AGI. The fair market value of the property on the date of the donation is used to determine the amount of the charitable deduction. Any amount that cannot be deducted in the current year can be carried over and deducted for up to five succeeding years.
Deductibility of Charitable gifts
Donation deductions are generally deductible for the year in which expenses are paid. In many cases, you can control whether you incur an expense this year or next. That means that you can control the timing of your itemized deductions to some extent. If you’re in a higher income tax bracket this year than you expect to be in next year, you may want to accelerate your deductions into the current year to minimize your tax liability. You can do this by paying deductible expenses before year-end and making charitable contributions before year-end.
If you pay a deductible expense by check, make sure it’s dated and mailed before year-end. It needn’t clear the bank by year-end, however. If you pay by credit card, the expense is deductible in the year the charge is incurred, not when the credit card bill is paid. A mere pledge or promise to make a charitable contribution is not deductible. Along with your cash contributions to a charity, remember to deduct noncash contributions like clothes. You can also deduct mileage if you use your car for charitable purposes.
Call us at LittleOwl CPA, Inc. to discuss your charitable giving plans before year-end.
