Maximize Your Charitable Impact by Nick Dietzen

NICK DIETZEN | March 4, 2021

Tax preparation may not be the easiest task for most people. Whether you prepare and file your taxes yourself or work with a tax professional, each spring many of us find ourselves scrambling to locate receipts, retrieve documents, and do some last minute tax research. Is this sounding familiar?

Why not skip the stress and take a proactive approach? Every tax season offers the potential to reset and truly prepare for the financial year ahead. While we are now several years into the most recent federal tax changes, many donors are surprised to find out that not all of their charitable contributions are yielding tax benefits.

Below are the thresholds for the federal standard deduction. If you do not have deductions (charitable and other qualified deductions) exceeding these amounts, then your gifts may not have a tax consequence.

*Important Note: taxes at the state level vary and regardless of your federal filing status, your charitable gifts may be deductible on your state taxes even if they are not realized on your federal filing.

We understand that while tax implications might not be the sole or even primary reason for giving, tax benefits can inform giving – the amount, the types of property, and the time horizon for giving might change based on any number of factors.

With that in mind, let’s look at a few ways that charitable preparation can maximize your charitable impact and set you up for fewer surprises next tax season.

For illustrative purposes, the standard deduction is a helpful marker for exploring two charitable gifting strategies:

Near the Borderline of the Standard Deduction:

• If you are finding that over the past few years you have both itemized and used the standard deduction, your tax status is probably very close to the standard deduction in any given year. How can you ensure that next year, your charitable gifts will all be used as deductions?
  • A common strategy known by names like “bundling” or “bunching” can be employed. Just like the various terms and the meanings they conjure up, the idea is to bring together all your charitable gifts and increase the total so that this year your increased giving will ensure that your deductions exceed the standard deduction. Let’s look at an example:
    • Terry and Taylor have reviewed their giving over the past three years and average about $7,000 in charitable giving each year. Combined with other deductions, they have itemized once and used the standard deduction twice. They consult their tax advisor and can comfortably project that by increasing their giving to $12,000 this year, they should easily exceed the standard deduction and will be itemizing next year, therefore realizing the full tax benefits of their giving. The couple is also heartened knowing their increased giving is coming at a time when the organizations they support have been stretched during the pandemic – a win-win!

Annually Using Standard Deduction:

• 

  Trends are starting to become more obvious for taxpayers who may have used the standard deduction for their taxes each year since the new legislation was passed.

• These donors are not itemizing, meaning their charitable contributions are not receiving the full benefit from a tax standpoint. There are a few examples of strategies that may be attractive to this subset of donors:
  • Drew and Mike consult with their tax professional as they are concerned about selling a property that will have large tax consequences in the coming year. This is a one-time event and the idea of bunching (increasing) charitable gifts makes sense. After discussing with their advisors, the best vehicle for Drew and Mike is opening a  Donor Advised Fund. They are able to commit several years’ worth of charitable gifts this year, receive a larger  tax benefit to offset the capital gains from the sale of the property, and can comfortably support their favorite causes and charitable organizations through grants this year and in subsequent years where they do not expect they will be itemizing taxes.
  • Kennedy and Alex are expert budgeters: they do not itemize and have a predictable fixed income in retirement. The couple does not have any children, and as part of their budget they include charitable contributions that make up 15% of their budget. Both are retirees in their 70s. After participating in a webinar on charitable giving, they become aware that they can make gifts from both of their retirement accounts. These gifts will not qualify for a tax deduction, but will reduce their retirement accounts first, which will be gifted to charity as part of their legacy planning efforts.  Additionally, this type of gift reduces their taxable income. This type of gift is known as a Qualified Charitable Distribution (QCD), oftentimes also called an IRA Charitable Rollover. A QCD counts toward satisfying the required minimum distribution (RMD) from Individual Retirement Accounts and lowers the taxable income for the taxpayer, which is a great way to give first before writing a check out of your traditional checking account. These gifts are eligible for donors age 70.5 years and above.

These examples and scenarios are for illustrative purposes and consulting a professional is advisable, given that any and all individual factors will contribute to tax planning. We hope that your spring is filled with good health, happiness and comfort in knowing a little bit of preparation can make this time next year all the more enjoyable!

Wishing you good health,

Nick Dietzen, Major Gifts Officer

To learn more, contact Nick at NDietzen@SBFoundation.org or (805) 880-9352.