With Unprecedented Need Come Exceptional Tax Benefits for Giving in 2020—How to Maximize Your Donations

Many of us may have been distracted from philanthropy in the pandemic-bred chaos of 2020. Yet far from taking a holiday, need is greater than ever, with organizations from food banks to disaster recovery efforts to bail funds seeing greater demand for their services. As the year draws to a close, it’s time to take stock of how much we can give and select the most advantageous methods for giving.

The past few years have registered record levels of charitable giving by Americans, with $450 billion donated in 2019, according to Giving USA, which publishes an annual report of philanthropy in the U.S. based on research by the Indiana University Lilly Family School of Philanthropy

Will the pandemic and associated recession interrupt the generosity trend? It’s not clear. More than half of US charities expect to raise less money this year, according to a May survey conducted by the Association of Fundraising Professionals. Yet other studies have shown increases in giving, as people heed calls for help, especially from local food banks. 

giving back 2020

If you are able to give this year, you could qualify for unprecedented tax benefits, thanks to the CARES Act COVID-19 response bill passed in March. The law allows individuals who itemize deductions to deduct up to 100 percent of adjusted gross income for qualified donations in 2020, compared to 60 percent of AGI in other years. For those who take the standard deduction, the law allows an additional deduction for charitable gifts of up to $300 per individual.

“2020 has brought much hardship to many people and institutions, including charities.  So many non-profit organizations can really use the extra charitable donations that they may receive,” said Ramsay Slugg, Managing Director in National Wealth Planning Strategies Group at Bank of America Private Bank.

How much charitable giving can save you on taxes depends on your marginal personal income tax rate. For example, a person in the highest tax bracket of 37 percent, who itemizes deductions, will save about $370 on their tax bill for every $1,000 donated to a qualified charitable organization.

Beyond simply writing a check, there are other, more complex ways to give to charity that may yield greater tax benefits, especially to high net worth taxpayers. But this can get complicated.

“Not all assets are created the same, and it may be advisable to use stocks, bonds, real estate or other assets, as well as cash and checks, to make gifts.  There are numerous rules in this area, so it is best to seek out competent counsel,” Slugg said.

For instance, the use of donor-advised funds has been growing like crazy in the past decade, accounting for nearly 13 percent of all individual contributions in 2018,  according to National Philanthropic Trust, which publishes an annual report on what it calls “the fastest-growing vehicle in philanthropy.” 

This is how a DAF works: The donor deposits money or other assets in the fund and reaps an immediate tax deduction. Once in the fund, the money grows tax free until the donor decides to grant it to a qualifying charitable organization. If you regularly give at least $5,000 a year, you might want to look into a DAF, Slugg said. 

Some high net worth individuals and families with at least several million dollars to give choose to set up a charitable trust, or private family foundation. 

“Most family offices donate money to the charities that have special meaning to the family member[s],” says Ryan Liss, president of Caliber 88 Tax & Wealth Planning Services, in the Chicago area. “A family foundation allows them to create an entity which greatly furthers family unity and acts as a fantastic teaching tool for the younger generations.”

Wealth planners can set up family trusts to provide benefits beyond tax deductions, such as a reliable income stream or estate planning functions, using a technique called split-interest giving. In this scenario, the donor sets up a charitable remainder trust that gives an asset to a charity while retaining the interest generated by that asset as income for the donor. At the end of life, because the asset is no longer part of the donor’s estate, this method can reduce estate taxes owed, if applicable.

Finally, some givers prefer to delay some or all of their giving until the end of life, using bequests in their will or trust. This method safeguards you from running out of assets because you gave too generously. However, postponing generosity until the end of life has one big downside.

“The main disadvantage is that they miss out on rather generous income tax benefits if they otherwise qualify to deduct the gift,” Slugg said.

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CarrieKirbyCarrie Kirby spends a lot of time asking people about something they think about but rarely talk about: money. Her work on personal finance, business and technology has appeared in San Francisco Magazine, Consumers Digest, Wise Bread and more publications. Carrie’s most recent work about her other love, travel, appears in The Best Women’s Travel Writing: Volume 10. She lives on an island (Alameda) with her husband and three kids, and blogs about getting them all where they need to go without owning a car at carfreemom.com.

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