2020 Year-End Charitable Giving
Transcript of Podcast Episode 103
Hello, this is Bill Rainaldi with another edition of Security Mutual’s “SML Planning Minute.” In today’s episode, “2020 Year-End Charitable Giving.”
December is often the busiest time for charitable giving for a couple of reasons. Families are determining if there is enough money left over in their annual budgets to afford these gifts, particularly in 2020, after considering the adverse economic impact of the coronavirus pandemic on household finances. Families are also more aware that time is running out if they are still seeking deductions to offset taxable income for the year.
Of course, December is also the holiday season when most families are getting ready to celebrate the holidays, and thoughts are turning toward helping others, or making a social impact.
As you think about your charitable giving, there are several things to keep in mind. In no particular order, let’s review a few of them.
1. Increased Tax Benefits of Charitable Contributions. The Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law on March 27, 2020. It has two important provisions impacting tax deductions for charitable contributions. For taxpayers who do not itemize, the CARES Act provides for a $300 above-the-line deduction for cash contributions to public charities. This provision is for 2020 and beyond. For taxpayers who itemize deductions, the adjusted gross income limitation has been suspended for 2020 only, meaning that charitable deductions can be up to 100 percent percent of adjusted gross income. Excess deductions can be carried forward for five years. However, charitable contributions must be in cash and made to public charities, not foundations or donor-advised funds, in order to take advantage of this provision. These provisions were intended to encourage charitable giving in 2020 to organizations that are providing pandemic-related assistance.
2. Gifts of Appreciated Stocks Rather Than Cash. 2020 has been a turbulent year for the equity markets because of the pandemic, but the latter half of the year has seen steady increases in the share prices of many publicly traded stocks. If those stocks were sold and the proceeds then gifted to charity, you would have to first pay capital gains tax upon the sale of the stock. However, if you gifted the stock to the charity, you avoid the capital gains tax. The charity can sell the stock, and because charities are tax-exempt, the charity will not lose any money from capital gains. You will get an income tax deduction based upon the fair market value of the stock that was gifted.
3. Qualified Charitable Distributions (QCDs). A QCD is a strategy that is available to individuals who are at least 70 ½ years of age. The age was originally tied to the age individuals were required to start taking required minimum distributions (“RMDs”). Although the SECURE Act (“Setting Every Community Up for Retirement Enhancement Act of 2019”) changed the required beginning date to age 72, it did not change the age for QCDs. Using the QCD strategy, distributions are made directly from an IRA to a public charity. In this manner, the distribution is not counted as taxable income, but yet the distribution will satisfy some or all of the RMD for that year. Because the QCD is not included in taxable income, no charitable income tax deduction is necessary, and there will also be no impact on your income tax bracket, taxation of Social Security benefits or Medicare premiums. QCDs can only go to public charities, and not to private foundations or donor-advised funds. The maximum amount of QCDs in any year is $100,000 per taxpayer. Note also that the CARES Act suspended RMDs for 2020 due to the pandemic, but QCDs can still be used.
4. Life Insurance as a Charitable Gift. Life insurance can also be used as a charitable gift to make a bigger social impact due to relatively large policy death benefits compared to the premiums required to fund the policy. There are several ways to use life insurance, depending upon your situation. Those methods may include:
- Naming a favorite charity as the beneficiary of an existing personally owned life insurance policy. This is suitable for those who do not need some or all of the insurance benefits to provide family financial protection.
- Gifting a life insurance policy that is no longer needed for family financial protection to a charity, particularly mature permanent (e.g., whole life and universal life insurance) policies that have significant cash values or that may no longer require premium payments.
- Gifting cash to a charity that you regularly donate to so that the charity may purchase a life insurance policy on your life using your cash gifts to pay the premiums. This may significantly increase the impact of your contributions through larger policy death benefits.
Each of these life insurance methods may result in varying charitable estate and income tax deduction consequences, so coordination with your tax advisor is important.
As you can see, there are several ways in which to make a charitable donation and have a social impact. It does not necessarily have to be through “checkbook philanthropy,” which is the typical way most individuals donate to charities. Each method may have varying tax consequences, so it is important to consult and coordinate with your Security Mutual life insurance advisor, tax and legal advisors to determine what fits for your particular situation.
Contact your local Security Mutual Insurance Advisor today to coordinate your financial plans and help you achieve your goals and objectives.
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