WAYS TO GIVE

CARES Act Charitable Donation Provisions

The charitable donation provisions of the CARES Act have been extended into 2021, with some improvements.

Did you know?

  • Even if you do not itemize deductions on your federal taxes, you can deduct up to $300
    of charitable gifts made in 2021, up to $600 if you file jointly.
  • If you do itemize deductions, you can deduct up to 100% of your Adjusted Gross Income (AGI) for charitable gifts made in 2021.
  • If you are at least 59½, you may take a distribution of any amount from your IRA or 401(k), give the same amount to a qualified charity, and avoid paying any federal income taxes on the distribution.

These provisions and more are included in the CARES Act II by the US Congress in December 2020 in hopes that it will stimulate charitable giving in 2021. So far, these have not been made permanent provisions, so this applies only to gifts made in 2021. You must act by December 31, 2021 to take advantage of these temporary changes.

What does this mean for you?

If you do not fill out schedule A on your federal income tax forms, you can get a deduction as if you did for gifts totaling up to $300, up to $600 for joint returns, to qualified charities like India Gospel Outreach. The ability to deduct $600 on joint returns is new for 2021.

If you do fill out schedule A, you may now deduct up to 100% of your AGI for gifts made to qualified charities. This deduction allowance is the same as 2020, but an increase from 60% in previous years. Qualified charities include public charities and churches, but do not include private foundations, supporting organizations, or donor advised funds, commonly called giving funds. As a public charity, IGO is a qualified charity.

Should you decide to give more than 100% of your AGI in 2021, you may carry forward the deduction for up to five years.

If you are at least 70½ years old, you already had the benefit of making an IRA charitable rollover contribution up to $100,000 as a satisfaction of your required minimum distribution.
That rule was not changed by the CARES Act or CARES Act II.

But if you are between 59½ and 70½, CARES Act II allows you take a distribution from your
IRA or 401(k), contribute the same amount to a qualified charity, and take a deduction of 100%
of the gift on your federal taxes. An IRA or 401(k) distribution is taxed as ordinary income. So if
you take a distribution of $50,000, that could put you in a higher income tax bracket and
significantly increase your federal tax. But if you give the $50,000 to one or more qualified
charities, you can take a deduction of 100% of it, preventing a higher tax bracket and totally
offsetting taxes on the distribution.

Corporations are also being encouraged to give by CARES Act II. Corporations can now deduct
up to 25% of their taxable income for gifts made to qualified charities in 2021, an increase from
10% in years before 2020.

 

Several important things to keep in mind when making your giving decisions:

  • The CARES Act II provisions apply only to federal taxes. Most states have not changed their rules regarding charitable contributions. Therefore, your deduction allowance for a charitable gift will be a lower percentage and you may owe state income tax on any IRA or 401(k) distribution
  • Remember that there is a difference between a tax credit and a tax deduction. A tax credit
    directly reduces the tax you owe. A tax deduction reduces the amount of income that is taxed. CARES Act II provisions have to do with deductions, not credits.
  • This summary refers to cash gifts only. CARES Act II does not change the rules for making non-cash gifts, such as stock, real estate, or other property.
  • Every situation is different. For example, you may not be able to take advantage of CARES Act II provisions because of the Alternative Minimum Tax (AMT) and other income tax regulations. Always check with your tax advisor before making a large gift.
  • Finally, CARES Act II applies only to 2021 charitable gifts. These provisions will likely
    not be extended.

To learn more, check with your tax adviser. This educational illustration is not professional tax or legal advice.

 

Appreciated Securities

Why does giving securities often make more sense than giving cash?

If you own securities, such as stocks, bonds, or mutual fund shares, it could be to your advantage to give the securities instead of cash to India Gospel Outreach. This is only true for appreciated securities—those which have gone up in value since your purchase—and which you have held for at least 12 months since purchase.

The best way to explain this is by example. Assume you own stock with a current value of $10,000, you have held the stock for at least 12 months, and your purchase price for the stock was only $3,000.

If you give that stock to IGO, you will receive a charitable deduction for the full $10,000. If you happen to be in the 35% income tax bracket, that will give you a tax savings of $3,500.

In addition, you avoid paying the capital gains tax you would have owed had you sold the stock instead of giving it. Capital gains tax is applied to the increase in value from the time you acquired until the time you sell. In our example, capital gains would be $7,000 ($10,000 minus $3,000). Therefore, if you are in the 20% capital gains tax bracket, you avoid additional taxes of $1,400 (20% of $7,000).

If you sell the stock, you will receive only $8,600 after paying capital gains tax. By giving the stock to IGO, you avoid $1,400 of capital gains tax and you receive a tax deduction of $3,500. But IGO gets the full value of the $10,000 gift to use in our ministry to reach India with the Gospel.

Your situation will be different, of course, but as long as the value of the security when given is greater than its value when purchased, and you have held it for at least a year, the cost of the gift to you will be less than its value to IGO. Always check with your tax adviser before transferring securities.

What if I like this stock and want to keep it?

It can still be to your advantage to give it to IGO. Here’s why. Continuing with the example above, in the future, if you ever decide to sell the stock, you’ll have a cost basis of only $3,000. You will have to pay capital gains tax on the difference in value at the time you sell it. If the value keeps increasing, that could be substantial.

But if you give the stock to IGO, you can buy it in the market on the same day for virtually the same price. In our example, this increases your cost basis to $10,000. Now, should you decide to sell the stock in the future, your capital gains will have been reduced by $7,000, saving you $1,400 in capital gains tax if you are in the 20% capital gains tax bracket at the time you sell.

IRA Rollover

An individual age 70½ or older with an Individual Retirement Account (IRA) may contribute up to $100,000 total annual from that account to a qualified nonprofit ministry, like India Gospel Outreach.

Why might this be beneficial to the individual?

  • Starting at 70½, individuals must begin taking distributions from their IRA’s, which could put them in a significantly higher tax bracket. A Charitable Contribution reduces the required distribution by the amount of the gift, avoiding higher income and possibly higher taxes.
  • If an individual takes the distribution as taxable income and then donates the same amount to a ministry, the amount they can deduct from taxes will be limited to 60% of adjusted gross income (AGI), which is now higher because of the IRA distribution, potentially causing a high tax bill. Even though the remaining gift deduction can be carried over to future years, the deduction will likely not be as valuable.
  • If an individual takes the distribution as taxable income, the increased (AGI) will also increase the amount of medical and miscellaneous expenses that cannot be deducted from taxes because of the percentage of AGI floor on these types of expenses.

What are the requirements for making an IRA Charitable Contribution?

  • The IRA owner must be 70½ or older.
  • The contribution must be made from a traditional IRA or Roth IRA (though it probably won’t be beneficial to contribute from the latter).
  • The contribution must be made directly from the IRA to the ministry. It cannot be distributed to the IRA owner first.
  • The contribution must be made to a qualified charity. Most nonprofit ministries qualify. But contributions cannot be made to private foundations, donor advised funds, or supporting organizations. IGO qualifies.
  • Both husband and wife can donate up to $100,000 from each of their IRA’s each year or a total maximum of $200,000.

Keep in mind that since you are not receiving the distribution as income, this contribution from your IRA is not a tax deductible gift.

To learn more, check with your tax adviser. This educational illustration is not professional tax or legal advice.

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