Families rarely give to charity solely for a tax break. Still, it is not unreasonable to consider that charitable giving historically has played an important role in tax-efficient wealth and estate planning. Although fewer families have qualified to write off charitable gifts following tax reform enacted in 2017, some recent COVID-relief packages have changed the rules and expanded the deductions available to generous donors.
The Tax Cuts and Jobs Act (TCJA) restricted charitable deductions for tax years beginning in 2018, allowing only a limited deduction of up to 60 percent of adjusted gross income for those taxpayers who itemize their expenses. Under the law, taxpayers claiming the standard deduction would not receive any tax benefit for their philanthropic efforts.
This changed in 2020 with the enactment of the CARES Act, which allowed itemizing taxpayers to write off 100 percent of cash contributions they made in 2020 to qualifying nonprofits, including publicly funded charities and certain foundations. For taxpayers claiming the 2020 standard deduction of $12,400 for individuals (or $24,800 for married couples filing joint tax returns), up to $300 in cash contributions to qualifying nonprofits could be deducted from 2020 taxable income.
The enactment of the Taxpayer Certainty and Disaster Tax Relief Act on Dec. 27, 2020, further extended these charitable deductions through 2021 while also increasing the maximum deduction available to married taxpayers claiming the standard deduction. Individuals making cash contributions to qualified charities in 2021 can claim deductions of up to $300.
According to the IRS, cash contributions to most charitable organizations qualify for the deduction in 2021. However, cash contributions to supporting organizations or establishing or maintaining a donor-advised fund do not qualify. Also excluded from the charitable deduction in 2021 are cash contributions carried forward from prior years and those made to most private foundations and charitable remainder trusts. All these exceptions to the rules underscore the importance of engaging in regular estate and tax planning under the guidance of experienced professionals.
To ensure you receive the full tax benefit of your philanthropic efforts, you may consider bundling together two or more years of charitable donations into the current year. This strategy of bunching several years of charitable gifts into one year can help you exceed the threshold for itemizing in that year and provide you with a deduction for the full value of your donation.
Another option for charitable-minded taxpayers over the age of 72 is to satisfy their annual IRA required minimum distribution (RMD) obligations by making qualified charitable distributions (QCDs) from their traditional IRAs directly to non-profit organizations. However, this strategy should be considered only if you are financially comfortable and do not need the savings in your IRA to fund your retirement years. In that case, a QCD can help you avoid income tax on amounts you transfer to a non-profit entity and yield a tax deduction, provided you follow specific rules prohibiting distributions from SEP IRAs, SIMPLE IRAs or 401(k) plans to donor-advised funds or private foundations.
The challenge with these strategies is that they require careful planning and timing of expenses, which may diminish the impact of your gifts. Instead, you may consider directing your gifts to donor-advised funds (DAF) that support the charities that matter most to you.
DAFs are savings accounts controlled by sponsoring organizations, such as financial services firms or community foundations, that accept and invest taxpayers’ irrevocable charitable donations and later distribute those funds via grants to designated charities. The funds themselves are 501(c)(3) charities that act as turnkey solutions to help you manage and maximize charitable giving and tax efficiency. Moreover, because DAFs invest donations for tax-free growth, a gift to a DAF in one year can result in a more significant grant to a recipient charity in future years.
In return for multi-year gifts to DAFs, you may receive an immediate tax deduction for the full amount of the donation in the year of contribution, or as much as 60 percent of AGI for cash gifts or 30 percent of AGI for gifts of appreciated assets, such as securities, real estate or interest in a family business held for more than one year. In comparison, charitable contributions to private foundations can yield deductions of up to 30 percent of AGI for cash gifts or 20 percent of AGI for appreciated assets. Non-cash gifts to a DAF or a private charitable foundation can also help you reduce or eliminate exposure to capital gains tax on the appreciation of those assets, allowing you to give much more significant gifts to selected charities. In addition, if your DAF contribution surpasses the IRS limit, you may be able to carry the deduction forward five years.
It is essential to recognize that the requirements for participating in donor-advised funds vary from one sponsor to the next. Even though there is no law governing when or how often a DAF must grant assets to qualifying charities, most have policies that require account owners to grant minimum gifts to nonprofits every few years to ensure those funds are put to work for charitable causes. However, DAF participants should note that while they will receive a tax deduction in the year of their contribution, their donations may not reach the intended charities in the same year. As a result, donors should investigate DAFs before making contributions to ensure that the selected fund squares with the donor’s unique philanthropic goals and philosophies.
According to recent data collected by the IRS, the number of taxpayers claiming charitable deductions in 2019 fell by more than 65 percent from the prior year, with charities receiving approximately 3.4 percent less in estimated dollars than in 2017. During the same period, however, charitable donations from foundations increased more than 7 percent, demonstrating that philanthropy goes far deeper than tax benefits. It is a code of ethics and guiding principle that families will continue to follow and pass down from generation to generation. The trick is to do your homework and seek professional guidance to improve the impact of your gifts over the long term.
About the Author: Eric Zeitlin is managing director of Provenance Wealth Advisors (PWA), an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs and a registered representative with PWA Securities, LLC. He can be reached at the firm’s Fort Lauderdale, Fla., office at (954) 712-8888 or info@provwealth.com.
 Provenance Wealth Advisors (PWA), 200 E. Las Olas Blvd., 19th Floor, Ft. Lauderdale, FL 33301 (954) 712-8888.
 Eric Zeitlin is a registered representative of and offers securities through PWA Securities, LLC, Member FINRA/SIPC.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.
Any opinions are those of the advisors of PWA and not necessarily those of PWA Securities, LLC. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of PWAS, we are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Prior to making any investment decision, please consult with your financial advisor about your individual situation.
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Updated on February 2, 2024