It’s time to think about year-end charitable contributions. For 2021, there are a plethora of enticing incentives for donors looking for a tax deduction for their donations.
2021 is the last year that cash donations to public charities (other than donor advised funds) will be deductible in amounts up to 100% of the donor’s adjusted gross income (the normal rate is 60%). This is the most meaningful and substantial tax deduction available to donors to charities.
Donors who ordinarily make equal donations year-after-year may want to increase their donations before year-end in order to take advantage of this pandemic-relief benefit.
“Page 1” Charitable Contribution Deduction
Prior to 2020, taxpayers could only deduct charitable contributions on the taxpayer’s Schedule A. This means they were subject to limitations due to the alternative minimum tax and the standard deduction. The CARES Act’s expanded tax benefits allow taxpayers to deduct up to $300 ($600 for married couples filing jointly) in charitable contributions directly from their taxable income in 2021.
Donations from IRAs
IRA owners 70½ years of age or older may donate up to $100,000 from their IRAs to public charities other than donor advised funds. If the taxpayer is 72 or older, the donation can count toward the taxpayer’s annual required distribution from their IRA. This can benefit the taxpayer by reducing their taxable income (by the amount of the contribution from the IRA to the charity), thus lowering their taxes and income-based Medicare premiums. To qualify for this qualified charitable distribution, the taxpayer must make the contribution directly from the IRA to the charity. Note that while taxpayers can also donate from their Roth IRAs, they will typically not receive the same benefit since most distributions are already tax-free.
Appreciated Stock and Cryptocurrency
Donations of appreciated stock and cryptocurrency held by the taxpayer for more than one year yield a charitable contribution deduction equal to the asset’s fair market value at the time of the donation. Not only does the taxpayer get a tax-deduction, but they will also avoid the capital gains tax they would have paid if they were to sell the stock or cryptocurrency instead of donating it.
Note that donations of cryptocurrency require an appraisal. It has been reported, however, that some charity donation platforms (e.g., Engiven) will soon have the capability to automatically generate the required appraisal.
In order to obtain a tax-deduction for a charitable contribution this year, the contribution must be completed (e.g., donated stock must be held in the charity’s name) no later than December 31. Don’t wait until it’s too late.