Before you shut the door on 2020, don’t miss out on strategies that can to boost your tax savings and giving.
For this year only, thanks to the federal CARES act, you can:
1. Deduct $300 without itemizing
If you take a standard deduction, in 2020 you can also deduct $300 per household for gifts to a qualified nonprofit (gifts to Donor Advised Funds are excluded).
2. Deduct up to 100% of your income
If you itemize deductions in 2020, you can deduct charitable cash contributions up to 100% of your adjusted gross income. These gifts must go to a qualified nonprofit, not a Donor Advised Fund.
3. Combine a Roth conversion with a donation
A Roth conversion moves money from a standard IRA into a Roth IRA. The benefit? All distributions from the Roth IRA are tax free. Even distributions of future growth are tax free. This year only, up to 100% of income can be offset by charitable deductions, including income created by a Roth conversion.
4. Give from your IRA and reduce taxable income
IRA accounts have no required minimum distribution (RMD) in 2020. Anyone who is 70½ or older is eligible to transfer up to $100,000 from their IRA directly to a qualified nonprofit. This gift donates pretax dollars. The earned income is never taxed because it goes directly to the nonprofit.
5. IRA gifts at age 55–70½
Again, IRA accounts have no RMD in 2020. IRA withdrawals for those 55-70½ are not penalized, but they are taxable. However, this year cash gifts can be deducted up to 100% of income. If you are already itemizing deductions this can help offset the tax impact from an IRA withdrawal.
6. Move your 401k/403b into an IRA rollover now
Because there are no RMDs in 2020, you can convert your 401(k) or 403(b) into an IRA rollover. And, you can do it without paying any taxes, even if you are 72+. You’ll then be set to make future donations from your IRA rollover whenever you want. A qualified charitable distribution from your IRA or IRA rollover reduces your RMD.
7. IRA beneficiary v. gift in a will
If you want to include a charitable gift in your will, one tax smart strategy is to leave part of an IRA, 401(k), or 403(b) account to a nonprofit. Starting this year, heirs (except spouses) must take out all funds and pay taxes within 10 years of inheriting. But any part left to a nonprofit avoids these taxes. So, if you’re leaving anything to a nonprofit, use these accounts first.
8. Make a charitable swap by donating appreciated investments
With a charitable swap, you can donate old shares of stock and immediately repurchase new shares in the same company. Your portfolio won’t change, but you’ll remove the capital gain and receive TWO tax benefits: the tax deduction is the same size as a cash gift, plus you’ll avoid paying capital gains tax.
9. Take an immediate deduction for donating inheritance rights to houses or farmland
You can donate the inheritance rights to farmland or real estate using a special deed. Doing this creates an immediate income tax deduction. Right now, these deductions are large because interest rates are low. For example: A 55-year-old donor who deeds the inheritance rights to farmland before the end of 2020 to get an immediate income tax deduction will still maintain the right to use the property for the rest of their life.
10. Bunch gifts with a Donor Advised Fund (DAF)
The 2018 tax law created much higher standard deductions, which resulted in fewer people being able to use charitable deductions since they no longer could itemize. One way around this is to put 5 years’ worth of donations into a DAF. By doing this, you can take a deduction for the entire amount this year. Because the deduction is so large, you can itemize it in 2020. In later years, you can make gifts to charities from your DAF.
To qualify for a 2020 tax deduction:
• Mailed gifts must be postmarked by December 31, 2020 (even if cashed in the following year).
• Credit card gifts must appear on your credit card statement on or prior to December 31, 2020.
• Gifts of securities, qualified charitable distribution (QCD), and real estate are more complex and may require two to four weeks to complete.
These are just a few strategies to discuss with your tax advisor.
To learn more about how your gifts can make a lasting impact, contact [email protected].