Your Year-End Guide to Giving to Charity in 2021
It's that time of the year. The time to do what you can, if you can, to help others in need by making charitable contributions. #GivingTuesday is the annual day that charities band together to encourage donations, and December is your last chance to give to nonprofits and reduce your 2021 taxes simultaneously.
So, Next Avenue has spoken with a few sharp financial advisers and charitable experts for their best advice on giving wisely in 2021.
First, a tax tip: Even if you won't itemize deductions on your 2021 tax return, you'll be allowed to write off up to $300 in cash donations to charities you make before Jan. 1, 2022. Married couples filing jointly can claim up to $600, a new tax break.
The Generosity of Americans in the Pandemic
Despite the challenges of the pandemic, Americans have continued to give — a clear sign that generosity is part of the fabric of American society.
According to the Giving USA 2021 Report, individuals donated roughly $324 billion, their highest total dollar amount to date. And the Lilly Family School of Philanthropy at Indiana University predicts a 6% increase in charitable giving by individuals in 2021.
It turns out that when Americans plan out their finances, they give more. According to a new online survey of over 2,000 U.S. adults conducted by The Harris Poll for Vanguard Charitable, Americans who actively budget their charitable giving give up to seven times more than those who don't. This survey also found that nearly three in four Americans gave money to charities in the past 12 months, often inspired by personal experiences, current events or news stories.
And older adults tend to be more generous than younger ones, favoring local and national charities over global ones, according to a new international study during the pandemic published in Nature Aging.
When deciding where you might give to charity this year, you'll likely think about organizations that have been a part of your life. That's great. But what about charities you've never assisted?
To find those, including nonprofits working on causes you'd like to support, it helps to do a little homework. You can vet charities at the websites of the leading rating services: Charity Navigator, Candid (formerly GuideStar) and CharityWatch.
CharityWatch provides statistics on the financial performance of more than 600 major American charities. And Charity Navigator recently launched a Giving Basket online tool that lets you support multiple nonprofits through one checkout experience, while controlling how much of your personal information can be shared with each organization.
Making Tax-Smart Charitable Donations
Charity Navigator suggests you reach out directly to nonprofits and ask them questions such as these: What progress is your organization making towards its goals? And what resources are available to increase my confidence in your work?
Now, a few words about making tax-smart charitable donations.
With the stock market at near all-time highs, some financial advisers are helping clients facilitate gifts of stocks they bought long ago that would otherwise stick them with lots of capital gains taxes if sold now.
"When you donate stock to a charity, you can sell it and pay no taxes. It's a win-win," said Juan C. Ros, a financial adviser at Forum Financial Management in Thousand Oaks, Calif. and former professional fundraiser at the ALS Association.
You can also donate so-called complex assets such as business interests, real estate, even digital assets like Bitcoin, added Ros. "Think beyond cash when planning your charitable giving," he advised.
One popular way to get a tax break now and continue your charitable giving into the future is by using a donor-advised fund.
Donor-Advised Funds for Charity
You get a tax deduction for the amount given to the fund in the year contributed and the assets are available for you to donate to specific charitable organizations at any time.
The three largest donor-advised funds, which are public charities, are run by the financial services firms Fidelity, Schwab and Vanguard; they received between 8.3% and 25.3% more in contributions in 2020 than in 2019, according to The Chronicle of Philanthropy.
Donations of appreciated assets, such as stock or real estate, can be given to the donor-advised fund without paying capital gains taxes. Any further growth of assets in fund is not taxable to you.
Another tax strategy to consider when making charitable contributions, said Jeremy Keil, a financial planner with Keil Financial Partners and host of the Retirement Revealed podcast and blog in New Berlin, Wisc., is bunching deductions.
This technique is useful because the standard deduction has gone up so much that it's now hard to have enough deductible expenses to exceed the standard deduction threshold and itemize. (The standard deduction for 2021 is $12,500 for single people or $13,850 if you're 65 or older; it's $25,100 for married couples filing jointly.)
A Smart Tax-Saving Strategy for Giving
With bunching, you take the standard deduction one year (when you don't have much in deductions) and itemize the next (when you do).
Keil cited bunching advice he recently gave a suburban Milwaukee couple who are clients. They're in the 32% federal tax bracket and typically gave $15,000 per year to a variety of organizations, including their local church.
"To increase the impact of their giving, while further reducing the impact of federal taxes, I suggested that they employ a bunching strategy and consider giving more this year so they could itemize these deductions on their taxes," said Keil.
The clients "decided to up their charitable game" and make a $30,000 contribution to a donor-advised fund which can fund future philanthropic requests, said Keil.
The bottom line: Keil said his clients saw a roughly $6,000 tax benefit from this bunching strategy this year.
Taxes, Charity and Retirement
When you turn 72, you must take Required Minimum Distributions (RMDs) from your retirement accounts, other than Roth IRAs, and pay Uncle Sam taxes on all those years of gains, based on an actuarial formula.
But here's a tax-saving charity wrinkle about RMDs: Donors taking the standard deduction can make what's known as a qualified charitable distribution (QCD). That's a direct transfer from your IRA to a charity. The amount of a QCD is then excluded from your taxable income and counts toward your annual required minimum distribution.
Ros noted that taxpayers can give up to $100,000 per year using QCDs, although that amount may be limited if you contributed to your IRA past age 70 ½.
QCDs can also help reduce your taxable income because they'll mean your Adjusted Gross Income will go down.
"This reduction can positively impact both the taxes your pay on Social Security benefits and also may keep you from having to pay a Medicare income-related adjustment, where your Medicare Part B premium increases due to higher income levels," explained Ros.
Factoring Charities Into Your Legacy
Regardless of your age, you may be in the fortunate position to want to make charitable contributions this year as part of your legacy.
"In my experience working with wealthy donors, their primary concern is to make a difference, not to reduce their tax bill," said David Foster, a financial adviser at Gateway Wealth Management in St. Louis. "They obviously, don't want to eschew any tax breaks available to them, but people want to make an impact and leave a legacy — be it to their kids, family, community, or favorite cause."
Often, Foster said, this creates an opportunity to develop a charitable mission statement for the family and clarify causes or organizations to give to now, rather than after death through a will.
"It's important to gain clarity on the kind of legacy you want to leave —hopefully while you are still alive," said Julie Hall, a wealth adviser and certified financial therapist at Vision Capital Partners in Ann Arbor, Mich.
According to Hall, one way to bring focus to your good works is to write a charitable-giving vision statement.
"Once confident about their financial independence, I walk clients through a series of discussions that help identify the causes or organizations they really care about," she noted. "A vision statement helps you define why you are giving and what inspires you to give. It also helps clarify where and when you would like to give."
One last tax tip for your generosity: If you want to make a gift to an individual who's been going through a rough time — perhaps after a COVID-19 job loss or someone having a medical emergency — the Internal Revenue Service lets you gift up to $15,000 this year ($30,000 from a married couple) without owing gift taxes.
David Conti is a New-Hampshire based writer, editor and content marketing specialist. He was an editor at Fidelity Investments and now writes about personal finance, retirement, aging and wealth for several national publications.