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Charitable Giving Strategies

Ed Slott breaks down the acronyms and more.

Christine Benz: Hi, I'm Christine Benz for Morningstar. With most taxpayers claiming the standard deduction, that means they don't receive credit for charitable giving on their tax returns. Joining me to discuss some charitable giving strategies is Ed Slott. He is a tax and retirement expert, and he is also the author of a new book called "The New Retirement Savings Time Bomb."

Ed, thank you so much for being here.

Ed Slott: Thanks for having me back. Great to be back. Thank you.

Benz: It's great to have you here, Ed. So, a big percentage of the population now takes the standard deduction versus itemizing their deductions. So, does that mean that for most taxpayers, taxwise, their charitable contributions really don't benefit them on their tax return?

Slott: Well, I always like to say they don't get a tax benefit. The benefit is giving to the charity. But you want the government to give you a little bonus with that. Most people are not getting a tax benefit, exactly as you said, on their tax return because most people don't itemize deductions like they used to years ago. The Tax Cuts and Jobs Act increased the standard deduction. So, I think the numbers--I don't know if you have the numbers--but last I heard about 90% of people are taking the standard deduction. So, they're not getting any tax benefit of the funds they continue to give to charity.

Benz: The CARES Act did include a small deduction available for nonitemizers. Can you talk about that?

Slott: Yes. For 2020, the tax returns you're preparing now, in 2021, anybody who didn't itemize can deduct cash gifts of $300 per return. So, if you're married, filing joint, it's still $300. You don't get double. Just a note--next year that would go up to $600. They fixed that one. The deduction for 2020 is a deduction, what accountants like to call, "above the line." It reduces adjusted gross income. That's an important number on the tax return because that's the number that determines what other items might be taxed and what other benefits, deductions, and credits you can claim. So, you want to reduce that number.

Next year, Congress changed it--next year, Congress said, you can get the $300 and $600 on a joint return, that's for '21, not '22. So, they went up to the $600 for '21 taxes that you'll be doing next year. But the deduction no longer reduces adjusted gross income. It reduces taxable income. The benefit of reducing adjusted gross income: It keeps your income lower, so things like the tax on Social Security or the Medicare Parts B and D, surcharges, and other items that are based on levels of income.

Benz: This deduction, you can't use it hand-in-hand with a donor-advised fund, is that right?

Slott: No, it has to be a direct cash contribution. It can't be where you're giving it to somebody to give to somebody else.

Benz: I wanted to talk about the qualified charitable distribution that's available for people over age 70.5. I guess a question is: If someone is over age 70.5 and has IRA assets, should they be contributing to charity in any other way?

Slott: Absolutely. Now, I'm not saying people should contribute to charity. If you're charitably inclined--I would never say that give your money away for tax reasons. So, if I were to say that--so, give all your money away and you'll never pay taxes. No, I'm saying: Whatever you're giving anyway. If you qualify for a QCD, a qualified charitable distribution, that's the way to give. That's the fix that fixes that problem.

The problem with the QCD, the only problem--not enough people qualify. The only people that qualify are IRA owners--not 401(k)s--IRA owners and IRA beneficiaries who are 70.5 years old or older. You must be 70.5. For example, if you're turning--you're watching this now--if you turn 70.5 tomorrow, you don't qualify today. It's not like these other provisions where during the year. You have to be 70.5. If you qualify, you can transfer, whatever amount you want to give to charity, you can transfer directly from your IRA to your charity. IRA funds are the best funds to give to charity because they're loaded with tax and it's excluded from income, reducing again adjusted gross income, and if you time it right, you can offset your required minimum distribution. Those generally start at 72. So, you have this little gap now because the SECURE Act increased the RMD age for required minimum distributions from 70.5 to 72. But the QCD age--I feel like I'm talking in acronyms, another language--the QCD age stayed at 70.5. So, you have a gap from 70.5 to 72 for people that fit in there. But some people might say, "Well, I won't do it till I can offset RMD income." No, use it now if you qualify. If you're giving to charity anyway, you will get a tax benefit that you otherwise wouldn't.

Let me give you an example. Let's say you normally give $10,000 to charity. Now you get no tax benefit for it because you're taking the standard deduction. If you do the giving this way and let's say, you're in a 24% bracket, just to throw that out, you will save 24% of the $10,000, or $2,400, in tax just by making the same gift this way. So, now, you're not only getting the larger standard deduction but you're also getting better than an itemized deduction. You're getting an exclusion from income, reducing AGI, so that's even better than a deduction. So, you do get the benefit back. And you're able to draw down IRA funds that would normally be taxable as ordinary income. The funds that go to charity are excluded from income. So, you're getting money out of the IRA at zero tax. That's always a good move.

Benz: If someone is watching and they are well under 70.5 or not there yet, do you have any thoughts on how people at that life stage can earn a tax benefit for charitable contributions that they'd like to make?

Slott: Well, if you're giving a lot of money and you don't qualify for the QCD, either because you don't have an IRA or you're not 70.5 yet, and you want to make large gifts, large enough that you would be able to itemize, the recent tax rules have eliminated the percentage limitation. In the past, you could only give away--if you were making a good chunk of gifts--you can only give up to 50% or 60%, it changed to, of your adjusted gross income. Now you see why that number is important. Well, that's all gone. Now, for cash gifts, you can give up to 100% of your adjusted gross income. So, if you're making big gifts, you can do it that way.

Another thing you can do is gift highly appreciated property. Let's say, you have stock you want to give--normally, if you sold that stock, you'd pay a big capital gains tax. You can gift that stock to the charity. You don't pay the capital gains tax, and you get a deduction for the full fair market value of that, as long as you've held it for a year. So, there's a couple of ways you can still get big gift deductions, but it would have to be big enough that it exceeded what you would have received with a standard deduction. So, it'd have to be big enough to allow you to itemize when you add in your other itemized deductions.

Benz: Would that strategy of bunching charitable contributions potentially make sense in this context, too?

Slott: Yeah, if you can put them all in one year, say, this year, where all of a sudden your itemized deductions skyrocket, then you can have a big benefit, and you do that every few years.

Benz: Ed, it's always great to get your perspective. Thank you so much for being here.

Slott: Thank you.

Benz: Thanks for watching. I'm Christine Benz.