While you may benefit from reduced tax rates and expanded tax brackets, it’s likely that many taxpayers will elect not to itemize this year. Rather, you may opt to claim the higher standard deduction (for 2020 – $12,400 for single filers and $24,800 for married filing jointly).
With that in mind, here are several strategies that will help you to minimize taxes, including several that involve donor advised funds (DAFs). iGiftFund offers a variety of flexible fund options that qualify for incentives under the CARES Act and the SECURE Act. These fund options are not generally offered by national commercial DAF sponsors.
Deduct up to 100% of your adjusted gross income (AGI) on cash contributions.
The CARES Act temporarily increases the individual AGI limits for cash contributions made to qualified public charities in 2020.
Tip: Although the CARES Act provisions do not apply to donor advised funds, iGiftFund offers a variety of flexible fund options that do qualify for the 100% AGI limit, including: Designated Funds, Field-of-Interest Funds, Scholarship Funds and Charity Endowments. See Note 1 for a summary of the flexible fund options iGiftFund offers.
DAFs enable you to contribute appreciated long term securities.
By contributing appreciated, long term securities (stocks, property, etc.) you will enjoy an immediate and maximum income tax benefit and avoid capital gains tax on appreciated values. In addition, your fund will avoid estate taxes. Assets can grow tax free and contributions will reduce alternative minimum tax (AMT), if you are subject to AMT.
Tip: iGiftFund can facilitate gifts and sale of illiquid assets (closely held S-Corp and C-Corp shares, limited liability arrangements, real estate, agricultural assets, mineral interests, etc.)…assets that many charities will not accept.
Tip: On gifts of appreciated, closely-held “S-Corp shares,” there are creative ways to structure the gift so as to reduce the impact of unrelated business income tax (UBIT) liability by 80%.
Execute a qualified charitable distribution (QCD).
The CARES Act enables any taxpayer with an RMD due in 2020 from a defined-contribution retirement plan, including a 401(k) or 403(b) plan, or an IRA, to skip those RMDs this year. This includes anyone who turned age 70 1/2 in 2019 and would have had to take the first RMD by April 1, 2020.
Tip: Although RMDs are waived for 2020, you can still direct distribution from your traditional IRA to eligible charitable organizations, using a Qualified Charitable Distribution (QCD). Thus, distributions reduce the taxable amount of your IRA distribution with no effect on your taxable income. You can take advantage of the higher standard deduction even though RMDs are waived for 2020. It’s a win-win-win strategy that works. If you aren’t age 72, consider positioning your retirement assets to take advantage of these rules once reaching age 70½.
Once RMDs are reinstated, the QCD amount can be used to reduce RMDs.
Tip: QCDs cannot be made to DAFs, private foundations or supporting organizations.
However, iGiftFund offers alternative strategies that do qualify. See Note 1 for a summary of the flexible fund options iGiftFund offers.
Tip: You can always take a normal distribution from your retirement plan, incur the tax liability, contribute the proceeds to a DAF, and mostly offset the federal liability tax with the qualified deduction. This strategy gives you the flexibility of a DAF, but the distribution may affect other taxes, such as your tax on Social Security income.
Take advantage of the increase in AGI limits on a contribution of cash to a donor advised fund.
Tip: Although the CARES Act precludes DAFs from the benefits of 100% AGI limit, you can still make contributions to a DAF. Under the Tax Cut and Jobs Act (TCJA), the annual deduction for cash contributions is increased from 50% to 60% of AGI. The result? More of your charitable giving dollars are eligible for itemizing. Again, the donor advised fund acts as your tax-smart philanthropic reservoir to offset the effect of windfall taxable events or fluctuating income. Note, this increase in AGI limits for cash contributions does not apply to private foundations.
Bunch itemized deductions into alternate years to meet increased threshold for itemization.
A smart strategy for taxpayers whose qualified deductions will not be sufficient to exceed the new standard deductions thresholds is called “bunching.” Under this strategy, you double-up and aggregate eligible deductions, including charitable giving, into a single year. This increases your likelihood in that year of being able to itemize deductions, thus exceeding the new standard deduction thresholds. In subsequent years, you can elect to take the higher standard deductions.
Tip: Your DAF becomes your family’s “philanthropic reservoir”, grants from which can provide steady and predictable support to your favorite charities over alternate years in a tax efficient manner. Charities will appreciate the consistency this strategy affords.
iGiftFund offers a variety of flexible fund option that do qualify for the 100% AGI limit on cash contributions and qualified charitable contributions (QCD):
Designated Funds – you specify the charity or charities up-front. iGiftFund will make annual distributions to your chosen charities in accordance with your wishes. You can use this popular strategy for any type of charitable grantmaking, such as supporting your church, establishing a scholarship program at your high school or college, endowing charitable organizations or charitable events in your community, etc.
Field-of-Interest Funds – You specify certain interests. These can include broad categories such as arts and culture, historic preservation, the environment, health, and more. iGiftFund selects the charity that meets your intended field-of-interest.
Unrestricted Funds – You leave the granting decision to iGiftFund’s Board of Directors to meet needs of your community as they change over time.
These funding strategies can be endowed, meaning that distributions will be made to your favorite charities, in your name, virtually forever.
* We are not tax experts…you are advised to work with your professional advisors on how the new tax laws will affect you.