Are you going to get the maximum tax benefits from your donations?
Posted on November 27, 2020
Patti and I are writing our checks for donations to charities this week. I’d guess this is the time of year you’ll be writing most of your checks. Patti and I made our major decisions a month or so ago. The purpose of this post is to state the ways to donate to make sure you get the maximum tax benefits.
1. The CARES Act of 2020 allows for 2020 that $300 of cash or credit card donations are tax deductible on top of your Standard Deduction.
Last year your donations would not be deductible unless you itemized deductions. The IRS says almost 90% of all taxpayers take the Standard Deduction. The Standard Deduction for 2020 is $12,400 for each taxpayer and an added $1,300 for tax payers over the age of 65.
2. If you are over the age of 70½ this year, you should ALWAYS first pay all your donations to charities directly from your Traditional IRA account. You are throwing away money – paying taxes you shouldn’t – if you don’t. You should have a checkbook for the account that you use for donations. You’ll record the checks you write as donations as Qualified Charitable Distributions (QCD) on your tax return. These donations have the same effect as the special $300 for 2020: you effectively have the benefit of QCD of being 100% tax deductible on top of your Standard Deduction. The QCD limit is $100,000 for each taxpayer.
You get an added benefit from QCD because these withdrawals from your IRA are not included in your calculation of income – your Adjusted Gross Income (AGI). That’s different than your other withdrawals from your IRA. Since QCD does not increase your AGI, you may avoid running into tax tripwires from high AGI. I HATE tripwires for Medicare Premiums – the amount deducted from our monthly Social Security benefits. A tripwire – and there are several – that you accidentally cross by just $1 of too high of AGI costs roughly $1,250 per taxpayer.
3. The CARES Act gives some an incentive to donate much more this year than in a typical year. 100% of all donations to charities this year are deductible this year.
This benefit is of help to the RARE individuals who have or understand that they will have More-Than-Enough. For a retiree that means your Safe Spending Amount (SSA; see Chapter 2, Nest Egg Care) is more the amount you want to spend to be happy. These individuals already donate a lot or plan to donate a lot in the future.
(If you’ve been a nest egger for four years, you’ve seen your SSA increase in real spending power by 25%, and this may have gotten you to More-Than-Enough. At normal returns for stocks and bonds, your SSA will increase by about 15% in real spending power every four or so years, so maybe More-Than-Enough is a few more years away.)
Maybe you typically donate a lot and run up against the 60% limit of AGI for current-year deductions for donations. Donations more than this have to be carried over to future years but can’t be carried forward for more than five years.
Maybe you are the rarer individual or couple who have a large IRA and plan on donating some or all of it at death. And you can foresee that you might pay taxes that you would like to avoid. You know that your RMD will double from your first-year amount at normal returns for stocks and bonds. If there are two of you, an ugly tax bracket that you might want to avoid will be half as far away as it is now when it’s only one who’s alive. You have a one-time opportunity in 2020 to simply right-size your IRA to avoid future taxes that simply don’t make sense to pay. You’re making donations now that you would plan on making at death.
Conclusion: It’s the time of year most of us write checks for donations to charities. We want to make sure we get the most tax benefit – pay the least taxes. The CARES Act of 2020 allows the first $300 of donations to be deducted from income on top of the Standard Deduction. All retires over age 70½ must first donate from their IRA as Qualified Charitable Distributions to get a similar tax benefit on top of the Standard Deduction. The CARES Act allows 100% current year deduction for donations to charities this year; certain individuals and retirees with More-Than-Enough may find this of benefit.