It’s that time of year, during the holiday season, that we think about how gifting, both charitable and otherwise, can be incorporated into strategic year-end tax planning. Charitable giving may be leveraged by utilizing income tax deductions, and estate tax planning may be enhanced by utilizing the annual gifting exclusion. Deciding what type of assets to gift (cash vs. noncash/securities) should involve a careful consideration of both tax and estate planning goals, paying careful attention to cost basis impact with regard to highly appreciated assets.
Income Tax Deduction for Charitable Gifts
In its ongoing response to the COVID-19 pandemic, Congress has extended and broadened a relief provision allowing those who do not itemize to deduct up to $300 per person, and up to $600 for married individuals filing jointly, for cash donations made in 2021 to qualifying charities.
If you itemize deductions on your income tax return, you can generally deduct your gifts to qualified 501(c)(3) charities. These include qualifying public charities, private foundations, religious organizations, and other nonprofit entities. You would usually choose to itemize if your total qualifying deductions exceed the available standard deduction.
2021 Standard Deductions (IRS)
Filing Status Amount
Married filing jointly $25,100
Head of household $18,800
The amount of your deduction for gifts to qualified charities is typically limited to certain percentages of your adjusted gross income (AGI) — 60% of AGI for cash gifts, 50% of AGI for certain noncash gifts, and 30% of AGI for long-term (held for more than one year) appreciated assets, including stocks and property. The law now permits electing individuals to apply an “Increased Individual Limit,” up to 100% of their AGI, for qualified cash donations made during calendar year 2021.
Similarly, C corporations, normally limited to 10%, can now apply an “Increased Corporate Limit” of 25% of taxable income for charitable contributions of cash they make to eligible charities during calendar year 2021. As with individuals, C corporations must elect the Increased Corporate Limit on a contribution-by-contribution basis.
Contributions qualifying for these increased 2021 AGI limits are those made in cash to qualified charitable organizations, from which supporting organizations, donor advised funds, private foundations, and most charitable remainder trusts are excluded. Disallowed charitable deductions (in excess of AGI) may generally be carried over and deducted over the next five years, subject to the income percentage limits in those years.
Gifting Appreciated Property
Charitable gifting of appreciated assets is a particularly valuable tool as it enables donors to realize the full market value of the gifts without having to realize and pay tax on the capital gains. For this reason, it can be more advantageous to gift appreciated assets charitably, as non-qualifying recipients of appreciated assets will receive a carryover basis for gifts made during life, and will then have to realize and pay capital gains tax upon their sale of the assets. You will want to be sure to retain proper documentation to substantiate the valuation of any noncash assets gifted charitably.
Qualified Charitable Distribution from an IRA
If you are charitably inclined, and over 70 ½ years of age, a smart way to meet your gifting goals is to use a Qualified Charitable Distribution (QCD) from an IRA. This QCD can also serve to meet all or part of your annual Required Minimum Distribution (RMD), which would otherwise be taxed as ordinary income. The Qualified Charitable Distribution (QCD) is a nontaxable distribution made directly by the Trustee of your IRA (other than an ongoing SEP or SIMPLE IRA) to an organization eligible to receive tax deductible contributions in an amount up to $100,000 per person. This charitable distribution is not included in your AGI, and thus allows a tax break even if you can’t itemize and are taking the standard deduction.
Timing Your Charitable Gifts
It is always wise to look at your marginal tax rate and how that may change from one year to the next when timing your charitable giving. The higher your marginal rate, the more valuable the deduction. Thus, whether you think your marginal tax rate is going up or down from one year to the next will help you decide if that gift should be made before December 31 of the current tax year or wait until after January 1 of the following year. It is also important to remember that for a gift to be included in the current tax year, the gift must be completed by December 31. Thus, a check must have cleared, title transferred, etc. or the gift is not complete and will fall into the following tax year.
Annual Exclusion Gifting
Under the federal unified estate and gift tax (IRS 2021 limits), every individual can make an annual gift of up to $15,000 to any single donee (recipient) with no estate or gift tax consequence or filing requirement. Thus, a couple trying to reduce a taxable estate and pass it to their children could together gift $30,000 to every child and grandchild under this annual gifting exclusion. This can be a useful planning tool for people facing taxable estates. In 2021, taxable estates in excess of $11,700,000 ($23,400,000 for married couples) will pay up to a 40% estate and gift tax on amounts (not given to qualifying charities) in excess of those limits.
It may be most beneficial to gift cash for annual exclusion gifting rather than an appreciated asset because a noncash gift made during the donor’s life is transferred with a carryover basis (the basis received by the donee is the same as the donor’s). As mentioned above, this means that the donee would have to realize and pay any applicable capital gains tax upon sale of the asset. Appreciated assets that are included in the donor’s gross estate and passed at death will typically receive a step-up in basis, so that capital gain will never be realized. The donee in that scenario receives the asset with a basis equal to the market value at the date of death. While it may still make sense to gift appreciated assets during life, as a part of larger estate tax planning strategies, it is always important to consider basis issues when gifting.
First Business Bank’s Private Wealth team can help you evaluate how to best make your year-end gifts, charitable and otherwise, in a manner that furthers your goals while minimizing tax consequences. Let us know today how we can help you.
The tax information provided herein is general and educational in nature, and should not be construed as legal or tax advice. First Business Bank Private Wealth does not provide legal or tax advice. Content provided relates to taxation at the federal level only. Rules and regulations regarding tax deductions for charitable giving vary at the state level, and laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of the information provided. As a result, First Business Bank Private Wealth cannot guarantee that such information is accurate, complete, or timely. Tax laws and regulations are complex and subject to change, and changes in them may have a material impact on pre- and/or after-tax results. First Business Bank Private Wealth makes no warranties with regard to such information or results obtained by its use. First Business Bank Private Wealth disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Always consult an attorney or tax professional regarding your specific legal or tax situation.