By Allison L. Kierman
Thanksgiving may be over, but here’s something that’s still related to giving thanks: There are fewer than 30 days left in the year. That’s less than a month to complete your 2021 charitable giving, develop or follow through on a tax strategy and make certain tax elections. Yikes!
But there’s still time to act. As you think about end-of-year giving, here are some current trends to consider:
Tax strategist versus philanthropist
Charitable giving is often thought of as something for those who are philanthropy-minded. It certainly can be. Charitable giving allows one to provide financial support to causes that are meaningful and make a legacy in one’s community. To others, however, charitable giving is foremost a tax strategy. It is giving to causes and organizations, instead of giving to the government.
For 2021, the Consolidated Appropriation Act of 2021 (the sixth COVID-related bill enacted by Congress) permits the following:
A charitable deduction of up to $600 for couples filing jointly, $300 for individual taxpayers. This is an above-the-line contribution that is deducted from the individual taxpayer’s income.
Individual taxpayers who itemize their deductions can deduct up to 100% of their adjusted gross income.
Corporations can deduct 25% of taxable income in 2021.
The donations must be in cash, to a qualified charity, not a Donor-Advised Fund or private foundation, and must be made during 2021.
Using a Donor-Advised Fund
A DAF is like a charitable investment account. You can set one up through many institutions. A donor contributes cash, securities or other assets and can claim a tax deduction in the year in which assets are contributed to the DAF. However, the DAF holds the fund for future distribution to qualified charitable organizations, after consultation with the donor.
Distributions can be made at any time, during life and after the death of the donor. Assets in the DAF are invested by the institution and may grow over time, increasing in the amount that is ultimately donated for charity, but with no tax to the donor. The donor can modify the beneficiaries of the DAF at any time (with some limitations).
Many donors even use funds in their DAF to make their annual synagogue membership contributions. It is important to note, once funds are contributed to a DAF the gift is irrevocable; and the funds cannot be later withdrawn and used for other purposes.
A conservation easement is a voluntary legal agreement to permanently limit the use of land to protect its conservation values. Conservation easements are either sold or donated by a landowner to a conservation organization, typically a land trust. The easement preserves the land by restricting its development for commercial uses.
Conservation easements provide tax benefits to landowners who can claim the value of the easement as a tax-deductible charitable donation. Because land is often an appreciating asset, this amount frequently exceeds the price paid for the land.
For individuals that do not have land to donate, there may be opportunities to invest in an entity that is purchasing land in which a conservation easement is later donated. The individual donor thereafter receives a K-1 and can claim a portion of the donation on his/her personal tax returns.
These types of investments are closely scrutinized by the IRS and may increase the risk of an audit, so all proper procedures must be followed before claiming a deduction for such an easement.
Charitable trusts are also important tools in successful tax planning. Like a DAF, the charitable trust is created to allow for a one-time lump sum contribution that is later distributed over a longer period. There are two main types of charitable trusts:
Charitable Lead Trust. This is a trust which provides a stream of income to a charity of the trustor’s choice for years or a lifetime. After the period of years, or at death, whatever is left goes to the trustor’s beneficiary(ies) with significant tax savings.
Charitable Remainder Trust. This trust provides a stream of income to the trustor for years or a lifetime and then gives the remainder to the trustor’s charitable beneficiaries, with significant tax savings once the trust term is complete.
Those who are over 70 ½ can donate all or a portion of their IRA-required minimum distributions (RMD) directly to charity. This is called the qualified charitable distribution (QCD). Typically, IRA distributions are treated as taxable income. However, if it is a QCD, the distribution is excluded from taxable income. For those already giving annually to a religious or other charitable organization, there is a strong benefit from making the distribution a QCD instead of taking the RMD and then later making a charitable donation.
These are some of the ideas and trends I’m seeing in charitable giving as we near the end of the year. As always, it is important to take into consideration both your charitable intentions and consult with a tax professional when weighing whether a tax strategy through charitable giving is right for you.
Allison L. Kierman is the managing partner of Kierman Law, PLC, an estate planning law firm based in Scottsdale, Arizona. This originally appeared in the Phoenix Jewish News, an affilated publication of the Jewish Exponent.