Tax laws

These Charitable Donation Tax Laws Have Been Changed To Help With A Pandemic

If you are inclined to support charity, 2020 might be a special year to do so.

The usual funding needs of nonprofits have been compounded by the COVID-19 pandemic. Many charities have seen donations plummet and income-generating events canceled while grappling with increased demand for their services.

A survey conducted in late October by the Alliance of Arizona Nonprofits found that nearly two-thirds of state charities expect to experience net operating losses of 10% or more, with some groups expressing concerns about their long-term viability.

Congress responded by relaxing the tax rules a bit for people who donate to help nonprofit groups. What follows is a discussion of some of the ways the freebies might make sense in the final weeks of 2020.

The tax giving rules can be used by donors to Season for Sharing, the annual vacation campaign sponsored by The Arizona Republic and azcentral.com to support local nonprofits. Overhead costs are borne by the Republic, which means that all gifts go to people and programs in need.

For more information on donating to the program, visit sharing.azcentral.com.

Use this year’s special deduction

Taxpayers who itemize can deduct donations to charitable groups. This basic tax rule has not been changed. But what has changed is a special donation deduction of up to $ 300 for people who don’t itemize.

This provision is new for 2020, created in response to the COVID-19 pandemic. There is speculation in tax circles that this may continue in one form or another in the years to come. “It may not be straight and done,” said Justin Smith, a certified financial planner specializing in charitable giving at Savant Wealth Management in Phoenix.

One caveat, he noted: The highest donation amount under this $ 300 provision also applies to single taxpayers and married couples filing jointly.

Maximize donations if you wish

People who make large cash donations to qualified charities and seek an itemized deduction typically face restrictions. In a normal year, you can deduct donations up to 60% of your adjusted gross income, with no tax benefit beyond that.

For 2020, however, Congress temporarily raised the limit to 100%, which means that you could effectively give an amount equal to all of your adjusted gross income for the year, and deduct it, if you have them. means and envy. Most people don’t have the means or the inclination, but it’s something to consider.

Donate from your IRA

A special rule on giving applies to older people with a penchant for charity. Taxpayers aged 70 and a half and over who have individual retirement accounts can donate up to $ 100,000 per year to charities and count donations to meet their minimum required distributions, or RMD, for the ‘year.

Why not just donate using non IRA money? Because making a direct payment as a “qualifying charitable distribution” can provide tax and other benefits. Even though RMDs have been canceled for 2020, you might want to pursue this option if you are the right age, have an IRA, and don’t need the money for living expenses.

The amount donated as a qualified charitable distribution does not constitute a direct tax deduction, as would normally be the case. But it is also not included in adjusted gross income. Non-IRA direct donations, on the other hand, reduce taxable income but not adjusted gross income, noted Jeffrey Levine, a tax commentator for Kitces.com who also heads Buckingham Wealth Partners.

Why does it all matter? If you have Medicare Part B or D coverage, you may have to pay higher premiums as your AGI increases. A higher AGI could also subject you to the 3.8% surtax on net investment tax that hits high income earners. So, since a qualified charitable distribution is not included in AGI, you could save money.

With a qualified charitable distribution, there is no specific tax return box to check or form to fill out, Smith noted. So be sure to include documents – such as a receipt from the charity – showing that you donated the money directly from your IRA in this manner.

Give securities, not money

During a speech sponsored by the American Institute of Certified Public Accountants, Levine pointed out that it is often much wiser, from a tax planning perspective, to donate assets other than cash – especially stocks, mutual funds or other assets on which you have unrealized paper gains. .

Not only would these types of donations qualify you for a charitable deduction, but you would also not be subject to capital gains tax on profits, as you would if you sold them first and then you were giving the proceeds.

Just be aware that you will need to donate valuable assets held in taxable accounts to receive these benefits. Those in IRAs, 401 (k) plans and the like would not qualify for the same capital gains avoidance.

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Get together if you can

Because taxpayers often have little in charitable donations and other deductions each year, many advisers recommend a grouping strategy. With this approach, you would give more than you normally would one year, and then give less or nothing the following year.

For example, if you typically donate $ 5,000 a year to charities but don’t have enough to itemize it, consider doubling that annual amount to $ 10,000. When combined with other routine deductions, you might have enough to itemize. For 2020, the breakdown kicks in if you have deductions greater than $ 12,400 for singles or $ 24,800 for married couples. Below these levels, you would instead use the standard deduction.

“Charitable giving tend to be the most discretionary candidate,” Smith said, meaning the amounts you contribute are very flexible, unlike, say, mortgage interest or property taxes.

A grouping strategy can also work particularly well if you expect to have unusually large medical expenses for the year.

Consider a charitable fund

Another option, especially if you’re not sure where you want to donate, is to create a donor-advised fund, allowing you to make a large donation one year (and take advantage of the tax deduction. then), while spreading your payments to charities over several years.

Many large brokerage firms, including Charles Schwab, Fidelity Investments, and Vanguard, can set up donor-advised funds, as can some philanthropic groups such as the Arizona Community Foundation.

Ongoing fees apply to funds advised by donors, but you also have the option of investing money that has not yet been disbursed. This way you may be able to increase your fund balance beyond the amount of your original donation.

Don’t Forget Arizona Credits

Most people orient their giving strategies with federal tax rules in mind. But Arizona also has valuable supplies. These include several key credits that, unlike deductions, can directly reduce your tax obligations, not just taxable income.

Popular state credits include those intended to fund private scholarships, extracurricular activities in public schools, qualifying charities, and groups that provide foster placement services.

Eligibility rules, donation amounts and other details vary. Check the Arizona Department of Revenue website (azdor.gov) for “tax credits.”

Unlike federal donation provisions – and most tax rules – donations related to Arizona tax credits do not need to be made by December 31. On the contrary, next April 15 is the relevant deadline.

Contact Wiles at [email protected]