As Covid-19 continues to spread and economic uncertainty increases, the adverse impact on charitable gifting in San Diego County continues to worsen. Charitable contributions had already been on a significant decline since 2018 due to The Tax Cuts and Jobs Act of 2018 (TCJA), which reduced the ability of many taxpayers to claim itemized deductions due to the increase of the standard deduction: from 46 million in 2016 to only 18 million in 2018. With so many nonprofits relying largely on donations, the Covid-19 pandemic has exacerbated the problem making it extremely difficult for these organizations to continue serving our San Diego Community.
To make matters worse, many of the people that need assistance from nonprofits are the ones that are being hardest hit by the pandemic with the San Diego unemployment rate currently at 15%. However, if you have the ability to make charitable donations, there are a number of ways for you to do so while saving money on your taxes, including some new opportunities that have become available due to recent federal stimulus. In this article, we review some of the best strategies to save taxes, give to nonprofits and highlight some great nonprofits that are doing amazing work in our local San Diego community.
What’s New In 2020
Changes to Standard and Itemized Deduction Limits
The CARES Act passed earlier this year allows donors to use a universal tax deduction of up to $300 on their 2020 tax return if they take the standard deduction. This provision means that all taxpayers who don’t itemize deductions can give $300 and get a deduction, otherwise referred to as an above-the-line deduction.
For taxpayers who itemize deductions, an additional tax incentive that increases the cap on charitable contributions from 60% of your Adjusted Gross Income (AGI) to 100% is now available in 2020. This recent legislation ensures that all taxpayers that donate to nonprofits will receive increased tax incentives this year.
As an example, let’s say a taxpayer who has $500,000 of AGI for 2020 would like to make a $1 million charitable contribution this year. In prior years the income tax deduction would be limited to $300,000 or 60% or $500,000.
For this year only, the CARES Act allows for a charitable contribution deduction of $500,000, 100% of AGI in this example. This would still leave an additional $500,000 million charitable contribution carry-forward (subject to the 60% of AGI limit) that can be used in the subsequent five tax years.
Increased Deduction Limits for Corporations
For corporations looking to extend their charitable giving efforts, the CARES Act raises the annual cash gift limit from 10% to 25% of corporate taxable income. To ensure the deduction comes through, each partner or shareholder must individually elect to receive the benefit of the increased charitable deduction on their taxes.
Higher Incentive for Food Donations
In addition to cash donations, the CARES Act now incentivizes food donations in a big way. The tax deduction available for food inventory has been raised from 15% to 25% for the 2020 taxable year, in the face of heightened visibility and exacerbation of food insecurity during the crisis. Taxpayers who donate food to their local food pantry can claim the value of that food on their taxes.
On a larger scale, if you’re a restaurant with an income of $100,000, and you donate $25,000 worth of food inventory, you can reduce your business’s taxable income to $75,000. If you’re able to donate more than 25% of your AGI — let’s say $50,000 — you’ll still only be able to write off $25,000 this year, and the additional $25,000 will carry over to the next year.
Traditional Gifting Strategies
Donating Appreciated Securities
For donors who own appreciated securities such as stocks in their brokerage accounts, donating these securities allows you to avoid paying capital gain taxes upon the potential sale. If you itemize deductions, you also get the benefit of a current-year tax deduction.
As an example, let’s say you purchased Apple stock for $20,000, it’s current value is $50,000 and you are in a combined federal and state marginal tax bracket of 25%. Selling your position means that you will owe $7,500 in taxes on the gain.
Since capital gain tax rates can be as high as 37%, this is a great way to boost the amount you are giving to charities and reduce your tax bill. Non-profits do not pay taxes on the sale of securities so both parties receive a substantial benefit. Fidelity Investments has a simple calculator to help you determine your potential savings.
Establish A Donor-Advised Fund for Charitable Giving
A donor-advised fund is a simple, tax-effective way to dedicate money to charitable giving. You can establish a donor-advised fund at most custodians and brokerages. You then make a donation of cash or other assets to the brokerage account, which makes you eligible to take a tax deduction for your charitable gift since the donor-advised fund is a program of a public charity. Once the donation is made, you can recommend which qualified charities you would like to give to.
The timing is flexible, as are the number of charitable causes you select to receive a donation. Let’s say that you anticipate a higher level of income in the current tax year and you typically gift $10,000 per year to charities. You can contribute $50,000 to a donor-advised fund in the current tax year and receive the full deduction for that year, but continue to distribute your $10,000 gift annually over the next 5 years to any charity of your choosing. Any growth that occurs in the account will be tax-free since the funds are earmarked as a charitable contribution.
Using A Charitable Deduction To Facilitate A Roth Conversion
A popular tax planning strategy with retirement accounts is to make a charitable donation to offset the tax costs of converting a Traditional IRA to a Roth IRA. Converting a traditional IRA to a Roth IRA typically means paying significant taxes, but making a charitable contribution can help offset that income. This strategy may make sense if you already donate regularly to a charity and have sufficient non-retirement assets to pay the tax cost of the conversion.
Qualified Charitable Distributions (QCDs)
In prior years, clients over age 70.5 who were taking Required Minimum Distributions (RMD’s) from their IRA accounts may have completed a Qualified Charitable Deduction (QCD). Tax law allows donors to give up to $100,000 of their RMD directly to a qualifying charity of their choosing.
The amount sent to charity counted towards the donor’s RMD for the year but was excluded from their taxable income. The CARES Act has waived RMD’s in 2020, but this is another popular tax planning strategy that to consider with retirement accounts in future tax years.
For donors that want to give substantially more than the aforementioned strategies, charitable trusts are a great option to donate during your life or to leave a legacy when you are gone. These trusts are irrevocable and the primary types are Charitable Lead Trusts (CLT’s) and Charitable Remainder Trusts (CRT’s).
Charitable lead trusts give a set amount of the trust’s income to a charitable organization, and then the remaining income either reverts back to the grantor’s beneficiaries or stays in the trust at the grantor’s death. CLTs are a great giving strategy when you don’t need a set amount of additional income, and your primary goal is to donate cash to an organization.
On the other hand, charitable remainder trusts, also referred to as split-interest trusts, make payments the opposite way of CLTs. First, the donor gives an asset to an irrevocable trust. Then, the income from a charitable remainder trust goes first to one or more beneficiaries in set amounts during their lifetimes, and then the remaining income goes to a charitable organization at death.
There are a number of ways we can help nonprofits during these difficult times when they need it the most. Whether you can donate your time through volunteering, donate items you may no longer need or give financial resources. Our tax system has always encouraged charitable giving through tax incentives, and changes in tax law this year have made 2020 one of the best years to do so.
To determine whether these gifting strategies are suitable for you, please consult your tax advisor. Lastly, if you are new to charitable giving or are looking for some causes you are passionate about, the following is a list of some great organizations in San Diego County that are constantly making a positive impact in our community.
Workshops for Warriors is a 501 (c)(3) nonprofit school that provides veterans and transitioning service members with industry-leading advanced manufacturing education and job placement. The organization trains, certifies, and places a veteran into a high paying entry level job in four to eight months. Students become welders, CNC machinists, CNC mill and CNC lathe operators, parts designers and programmers.
Zero8hundred empowers our military service members, recent veterans and their families with the essential connections they need to effectively access the local opportunities they’re looking for so they can thrive in their transition from the military to civilian life in Southern California.
Connecting people, art, and nature to help people discover their own creativity. The Ilan-Lael Foundation was founded by James and Anne Hubbell in 1982 and has sponsored public art projects, lectures, seminars and exhibitions in San Diego and Tijuana.
Second Chance offers specialized workforce readiness training, sober-living housing, educational programs and support services essential to achieving self-sufficiency. The mission is to disrupt the cycles of incarceration and poverty by helping people find their way to self-sufficiency.
To empower Latinas through education, community service, advocacy and leadership development. MANA de San Diego is the largest and most active MANA chapter, with more than 4,000 supporters.
To accelerate the achievement of equal status for all genders in the workplace. In our work with employers and communities, we use data-driven tools to collaboratively design and implement actionable plans. Our strategy generates impact on both the macro and micro levels:
The University of San Diego is a Roman Catholic institution committed to advancing academic excellence, expanding liberal and professional knowledge, creating a diverse and inclusive community and preparing leaders who are dedicated to ethical conduct and compassionate service.
Moving learning opportunities forward for all San Diegans to achieve economic mobility through education that works. Educating and training adults and connecting workforce talent to regional businesses.
Friends of Downtown (FOD) is a 100% volunteer registered 501(c)3 non-profit organization committed to the enhancement of San Diego’s downtown community through scholarships, community service, education and networking. The organization is made up of professionals and residents who work and/or live in the downtown community.
San Ysidro Health is a federally qualified community health center providing high quality, compassionate, accessible and affordable health care services to 107,000 patients at 42 program sites from South Bay to rural East County.
Danny G. Michael is the founder and CEO of Satori Wealth Mangement, Inc. He has 20 years of experience in retirement planning working with individuals, families, and business owners.