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2021 Year-End Giving Guidelines

December 06, 2021

Now is the time to donate to charity! Your donations can provide you with valuable tax savings. Learn more.

Giving to charity this time of year is a smart move – not only will you be benefiting those less fortunate around the holidays, but your donations can provide you with valuable tax deductions. Here’s what you should know as we approach December 31.

Reduce taxes for 2021

Give long term appreciated securities instead of cash- Before you write that check or dip into your wallet, think about contributing stocks, bonds or mutual funds instead. Generally appreciated publicly traded securities can be donated to charity with the added benefit of not paying tax on the gains if it was otherwise sold. You can claim the fair market value (FMV) as an itemized deduction on your tax return subject to Adjusted Gross Income (AGI) limits.

Think about establishing a donor advised fund (DAF)- Check out our blog, Did the TCJA Impact Donor Advised Funds? A donor advised fund (DAF) also known as a charitable gift fund or philanthropic fund allows the donor to make a tax-deductible contribution to the fund and then recommend grants from the fund to a specific public charity. This is great for year-end tax planning if you’re not yet sure which charities you would like to support but want to get the tax deduction before year end.

Consider bunching your donations – If your itemized deductions are close to the standard deduction each year, consider bunching your donations into one year. Under this strategy, you contribute in year one what you would have contributed over the next three or four years. This can provide a better bang for your buck and ensure you don’t lose some of the benefit of your charitable tax deduction because you fall under the standard deduction.

Consider a qualified charitable distribution from an IRA- Do you have an IRA and are you receiving Required Minimum Distributions (RMD's) from the account? Another consideration is making a qualified charitable distribution from an IRA. Check out our blog, Tax Saving Strategy: Qualified Charitable Distributions (QCDs). A QCD can help you lower your taxable income and benefit the charities of your choice, because it does not have to be included in your income. It is considered an “above the line deduction” meaning that it is a reduction to your gross income as opposed to a potentially limited itemized deduction. You can donate up to $100,000 per spouse directly from your IRA's subject to certain limitations.

What tax changes are on the horizon?

As our blog, Build Back Better Act Proposes Surcharge on High Income Individuals, Estates and Trusts mentions, the latest version of the Build Back Better Act proposes imposing a 5% surcharge on MAGI exceeding:

  • $5 million for married individuals filing separately
  • $200,000 for estates and trusts
  • $10 million for all other individuals

Additionally, an extra 3% surcharge would be assessed on MAGI exceeding:

  • $12.5 million for married filing separately
  • $500,000 for estates and trusts
  • $25 million for all other individuals

If the proposal goes through, the changes would be effective for taxable years beginning after December 31, 2021.

Additionally, the Build Back Better bill as proposed would increase the limitation on itemized state and local tax deduction (SALT) from $10,000 to $80,000. This proposal would be effective for tax years beginning after December 31, 2020 and would mean that some taxpayers who would otherwise be expecting to take the standard deduction may actually be able to itemize their deductions.

Lastly, the Build Back Better bill proposes to eliminate the "back-door Roth." This is technique where a taxpayer can make a non-deductible contribution to a traditional IRA and then convert those contributions to a Roth IRA. The benefit of a Roth IRA is that distributions are non taxable as long as certain rules are met. If the proposal passes, this technique would be eliminated after December 31, 2021.

Discuss the various charitable giving options with your tax advisor in order to maximize tax savings. We can help.

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