While Giving Tuesday has come and gone, it is still a wonderful time of year to give to charity. There are several ways to contribute this year and a handful of tax provisions that you should be aware of before you do.
As a result of the most recent stimulus package, the Consolidated Appropriations Act, 2021 and handful of significant provisions in the 2020 CARES Act related to charitable contributions were extended through 2021.
One of these noteworthy extensions is the “above-the-line” deduction for charitable contributions.
If you elect to take the standard deduction this year, you can once again deduct up to $300 ($600 for a married couple) from your adjusted gross income if you make a qualified cash contribution to a public charity. By lowering your adjusted gross income, you reduce your taxable income and thereby reduce your federal tax obligation.
If you itemize your deductions, you are once again permitted to deduct financial donations up to 100% of your 2021 adjusted gross income. Accordingly, a taxpayer who itemizes deductions could conceivably donate 100% of their adjusted gross income to public charity and thus owe zero income tax for the year 2021.
Filers who itemize their deductions may also want to consider giving appreciated securities to charity instead of cash this year.
Given the stock market’s solid run, the majority of securities have appreciated over the past 10 years. If you were to sell these appreciated stocks, they would be subject to capital gains taxes. The amount you owe in capital gain taxes depends on whether you’ve owned the shares for more than one year or less than one year and also on your total annual income.
However, if you donate the stock directly to a charity, you can avoid paying capital gain taxes assuming it’s a tax-exempt nonprofit. In other words, the donation allows you to avoid paying taxes on the increased value of the stock and thus reduce your taxable income. As an added bonus, the charity also avoids taxes when they sell the donated investment.
The tax-deduction limit for gifting stock to a public charity is up to 30% of your adjusted gross income, though you can carry any excess over for up to five years.
To donate stock to charity, you’ll first want to find whether the receiving charity has a brokerage account that can accept gifted stock. To obtain this information, contact the charity directly or visit the charity’s website.
People over the age of 70½ have another tool to use when it comes to charitable donations of up to $100,000 per year.
The Tax Act of 2017 made qualified charitable distributions permanent. These distributions do not need to be reported on the taxpayer’s Form 1040. But the money must go directly from the person’s IRA to the charity. This means that the tax payer cannot transfer the distribution to their bank account and subsequently donate cash to the charity.
Most importantly, before you make any financial contribution to a charity this year, make sure you research the organization prior to your commitment. Happy giving.
This article originally appeared as a column for the Cleveland Jewish News.