The Tax Cuts and Jobs Act in 2017 increased the amount of the standard deduction (for 2021: $12,550 for single taxpayers and $25,000 for married taxpayer filing jointly) so that now an estimated 90% of all tax filers use the standard deduction and do not itemize. Nevertheless, there is still tax planning that even taxpayers who do not itemize their deductions may wish to consider.
Like all tax planning, there are lots of details, exceptions, and special rules to consider. And there can be other strategies applicable to some taxpayers. Prior to taking any action, a taxpayer should consult with the taxpayer’s tax and legal advisors. Further note that at the time this article was written), proposed changes to various provisions of the tax code are being discussed. If adopted, some changes could impact some of the tax planning ideas set out in this article—talk to your tax advisor.
Charitable Deduction for Non-Itemizers. For 2021, the Consolidated Appropriations Act of 2021 extended the tax deduction for cash gifts to St. Louis Audubon Society and other public charities even for taxpayers who do not itemize deductions. The amount of the deduction was set at $300 for an individual and $600 for a married couple filing jointly. The deduction is against adjusted gross income.
The deduction is limited to only cash contributions. Contributions of any kind of property, including marketable securities and real estate do not qualify. Contributions must be made to a public charity like St. Louis Audubon Society. Contributions to a donor advised fund do not qualify.
Bottom line is that generally all taxpayers making cash charitable contributions can claim this deduction.
Increase in Deduction for Qualified Charitable Contributions. There are limits on the amount of charitable contribution that may be deducted for those taxpayers who itemize. The general rule is that the deduction for cash contributions is limited to 60% of adjusted gross income. However, the amount for 2021 for individual donors has been increased to 100% of 2021 adjusted gross income.
The deduction increase is limited to only cash contributions. Contributions of any kind of property, including marketable securities and real estate do not qualify. Contributions must be made to a public charity like St. Louis Audubon Society. Contributions to a donor advised fund do not qualify.
Donation of Appreciated Securities. With a strong stock market (at the time this article was written), the donation of appreciated stocks and certain other assets that have been held for more than 12 months can be a very attractive for tax planning. Basically, the fair market value of the stock or other asset at the time of donation is a charitable contribution (which would, of course, only have a tax benefit for a taxpayer that itemizes). In addition, whether or not the taxpayer itemizes, the capital gain that would normally be taxable is not taxable.
The deduction for contributions of appreciated securities to public charities like St. Louis Audubon Society is limited to 30% of adjusted gross income (AGI), while contributions of cash have higher AGI limits as discussed above. If a taxpayer’s donation exceeds the AGI limits, then the excess charitable deduction can be carried forward for up to five years.
Qualified Charitable Distribution from an IRA. Required Minimum Distributions (RMDs)–the amount that an older taxpayer must withdraw from most retirement accounts–are back in effect for 2021 after being waived by the CARES Act for 2020.
For taxpayers over age 70 ½, contributions from an IRA (other than a SEP or Simple IRA) directly to a qualified charity like St. Louis Audubon Society (a qualified charitable distribution (QCD)) have benefits. First, the QCD counts toward the amount of the required RMD. And, whether the taxpayer itemizes or not, the distribution is not taxable income to the taxpayer and is not included in the taxpayer’s adjusted gross income. In effect, the taxpayer (even a taxpayer who does not itemize) is getting a charitable donation deduction since the distribution is not brought first into the taxpayer’s taxable income. (In addition, if AGI is reduced, that may result in lower Medicare premiums and may reduce exposure to net investment income tax). QCDs are limited to $100,000 per year (but married couples filing jointly may each exclude up to $100,000).
Generally, to make a charitable contribution from an IRA, a taxpayer needs to contact the IRA administrator. IRA administrators often require that year-end requests be made sufficiently prior to the end of the year (often by November 15 December 1 or earlier) so that the administrator has time to process the contribution.
Bottom line is that QCDs provide a very attractive tax benefit: generally, the money contributed to the IRA is done tax-free, the gain accumulated tax-free, the distribution is made tax-free, and the distribution does not increase adjusted gross income with the resulting tax, Social Security, and Medicare ramifications.
Use of a Donor Advised Fund. A donor advised fund (DAF) is a charitable investment account that a taxpayer establishes at the charitable arms of Fidelity, Schwab, Vanguard and so on. Basically, the taxpayer makes a donation to the DAF, and then from time to time directs the DAF to make charitable donations from the DAF to 501c3 charities like St. Louis Audubon Society. Income earned by the DAF is not taxed. Typically, there is no cost to hold such a fund. Setting up a DAF is routine, but make sure to read the rules for the particular fund. Note that an IRA may not make a donation from the IRA to a DAF as a QCD.
Two reasons why a taxpayer might want to set up a DAF are:
- The charitable donation process from the DAF to the 501c3 is usually simple and can easily be done on-line. Information of past donations is readily available. In some cases, the donations can be simply made from a phone app, for example at the end of a gala or other event.
- The chartable donation from the taxpayer to the DAF is a charitable donation deductible for income tax purposes. As noted above, the standard deductions for 2021 are $12,550 for a single taxpayer and $25,100 for a married couple filing jointly. Consequently, value to the taxpayer is only achieved if the taxpayer has aggregate deductions (e.g., state and local taxes up to the cap, charitable deductions, etc.) in excess of the standard deduction. For some taxpayers, it can make sense to make a one-time (e.g., in 2021) large donation to a DAF covering multiple years of planned charitable giving in order for the taxpayer’s aggregate deductions for that year to exceed the standard deduction, and then use the standard deductions in subsequent years (e.g., 2021 year end giving, and charitable giving for one or more years going forward).
SLAS Details. If you would like to make a year-end donation to St. Louis Audubon Society, here is the information:
St. Louis Audubon Society (Missouri non-profit, 501(c)(3) corporation)
Address: P.O. Box 220227, St. Louis, Missouri 63122-0227
EIN: 43-6052063
