James M. Richardson CFP®, ChFC®, APMA® is a Private Wealth Advisor and CERTIFIED FINANCIAL PLANNER practitioner with Richardson Private Wealth Advisors, a private wealth advisory practice of Ameriprise Financial Services, Inc. in Raleigh, N.C. He specializes in fee-based financial planning and asset management strategies and has been in practice for 29 years.
In these challenging economic times, many worthwhile charitable organizations find themselves in a precarious financial position. Meanwhile, they are experiencing unprecedented demand, especially those charities who provide basic needs like food and shelter.
Thankfully, new, unique provisions in the tax code have been implemented in response to the COVID-19 crisis, creating more incentives for giving. You may be able to better leverage your donations with tax-smart strategies. So, if you’re able to extend your generosity during this time of increased need, it may be an opportune year to make contributions to charity.
Everyone can claim a deduction
In 2020, the standard deduction is $12,400 for a single tax filer or $24,800 for a married couple filing a joint return (even more for those age 65 or over). Your itemized deductions would need to exceed those levels to benefit from itemizing. Those who don’t typically itemize are not able to deduct charitable contributions from their taxes. However, on your 2020 tax return, you will be allowed to deduct up to $300 in cash contributions to qualified charities even if you choose the standard deduction.
A higher ceiling on tax-advantaged giving
If you do itemize deductions and plan on large gifts, the tax rules prevented you from claiming a deduction that exceeded 60 percent of your adjusted gross income (AGI) in a single year. In a unique provision for 2020, you can now claim a deduction valued at up to 100 percent of your AGI for charitable contributions. If your financial circumstances put you in a position to make substantial gifts, this will be the most favorable year, from a tax perspective, to do it.
A tax-efficient distribution strategy from your IRA
A special provision for 2020 allows individuals subject to Required Minimum Distributions from IRAs and workplace retirement plans to forego those distributions. If you don’t need to draw from your IRA to meet your income needs for this year, you still have an opportunity to put the funds that would have been RMD dollars to use as a charitable contribution. The most tax-efficient way to do so is with a Qualified Charitable Distribution (QCD). Up to $100,000 per year can be contributed in this way to charitable organizations. With a QCD, if you are 70.5 or older, funds are distributed directly to the charity from your IRA so you don’t have to claim the income before making the contribution. That is a tax saving strategy you can use whether you itemize deductions or claim the standard deduction.
Put a giving strategy in place
Your circumstances today and your financial future may require careful re-assessment given the current economic challenges. Your charitable giving strategy should be incorporated into a review of your comprehensive financial plan. Check with your financial advisor and tax professional as you consider your options for giving in 2020 and beyond.