August 20, 2021

Four Ways to Maximize Charitable Giving Impact in 2021

By Sam Kang, President, Schwab Charitable

Contributors:

Caleb Lund, JD
Director of Charitable Strategies Group, Schwab Charitable

Hayden Adams, CPA, CFP®
Director of Tax and Financial Planning, Schwab Center for Financial Research


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We all continue to navigate the challenges of a once-in-a-lifetime global pandemic. And despite these difficult times, we have witnessed historic levels of generosity from individuals who have significantly increased their giving to support those who have been most impacted.

According to Giving USA, charitable giving in the U.S. reached a record $471.44 billion in 2020. Schwab Charitable donors also gave more during the past fiscal year ending on June 30, 2021, awarding a record $3.7 billion in grants to over 113,000 charities.

As we approach giving season, we want to remind donors that 2021 is a great year to give and invite them to consider four key ways to increase their giving power at a time when philanthropy has never been more important.

Strategies for Maximizing Impact in 2021

1. Give appreciated non-cash assets instead of cash

One of the most powerful tax-smart strategies is donating appreciated non-cash assets held more than one year. Donors who use this strategy can generally eliminate the capital gains tax they would otherwise incur if they sold the assets first and then donated the proceeds, potentially increasing the amount available for charity by up to 20%. This strategy can also significantly increase their tax savings, as shown in the example below.

In fiscal year 2021, approximately 60% of contributions to Schwab Charitable were in the form of non-cash assets, including publicly traded securities, restricted stock, and private business interests.

Shares of publicly traded stock XYZ were purchased five years ago for $5,000 and now have a fair market value of $50,000. Assuming a 15% federal capital gains tax rate, a donor selling the stock would realize appreciation of $45,000 and owe $6,750 in federal capital gains taxes, leaving $43,250 available for charitable giving and a tax deduction. If the donor donates the stock to charity, the donor has an additional $6,750 for charitable giving and a tax deduction and an additional $8,370 in tax savings.

This hypothetical example is only for illustrative purposes. The example does not take into account any state or local taxes or the Medicare net investment income surtax. The tax savings shown is the tax deduction, multiplied by the donor's income tax rate (24% in this example), minus the long-term capital gains taxes paid.

2. Leverage a charitable deduction strategy

Some donors may find that the total of their itemized deductions for 2021 will be slightly below the level of the standard deduction. It could be beneficial for them to bunch or combine 2021 and 2022 charitable contributions into one year (2021), itemize deductions on their 2021 tax returns, and take the standard deduction on 2022 taxes. In addition to achieving a large charitable impact in 2021, this strategy could produce a larger two-year deduction than two separate years of itemized deductions, depending on income level, tax filing status, and giving amounts each year.

 

A married couple annually has $23,000 of itemized deductions, including $10,000 in charitable donations. This is below the standard deduction amounts of $24,800 in 2020 and $25,100 in 2021. They could take a standard deduction each year and over two years claim $49,900 in standard deductions. A more tax-smart approach is to bunch two years of $10,000 donations into 2020 for $33,000 of itemized deductions, take the $25,100 standard deduction in 2021, and have $58,100 of total deductions over two years.

This hypothetical example is only for illustrative purposes.

Donors who bunched two or more years of contributions into 2020 and subsequently will take the standard deduction for 2021 may also consider taking the special $300 or $600 CARES Act deduction for cash donations made to operating charities in 2021, as described below.

Alternatively, donors who itemize deductions and wish to achieve a large charitable impact in 2021 may choose to give beyond annual deduction limits and carry over the excess amounts up to five tax years.

Keep in mind that donors seeking a 2021 tax deduction must have their gift received and processed by December 31, 2021, and some non-cash assets require additional processing time.

3. Give more by donating retirement assets

Donors who are in or near retirement or reviewing estate plans might consider using three tax-smart tips to help maximize their charitable impact this year as part of their overall legacy planning.

The first tip is to make a Qualified Charitable Distribution (QCD) of Individual Retirement Account (IRA) assets. Whether itemizing deductions or claiming the standard deduction, individuals age 70½ and older can direct up to $100,000 per year tax-free from their IRAs to charities through QCDs.* By reducing the IRA balance, a QCD may also reduce the donor's taxable income in future years, lower the donor's taxable estate, and limit IRA beneficiaries' tax liability. QCD requests generally should be initiated by early December at the latest to ensure processing is complete before the end of the year.

The second tip is to use a charitable deduction to help offset the tax liability of a retirement account withdrawal. This strategy may be used by individuals over age 59½ (to avoid an early withdrawal penalty) who will itemize deductions for 2021. As with the above strategy, a withdrawal offers the additional benefits of potentially reducing a donor's taxable estate and limiting tax liability for account beneficiaries.

The third tip involves converting retirement accounts to Roth IRAs. Individuals who itemize deductions and have tax-deferred retirement accounts, such as traditional IRAs, can use charitable deductions to help offset the tax liability on the amount converted to a Roth IRA. The primary benefits of a Roth IRA are tax-free growth, potentially tax-free withdrawals (if holding period and age requirements are met), no annual required minimum distribution, and the elimination of tax liability for beneficiaries (depending on the timing). Be sure to talk with a tax professional or financial advisor before deciding to do a Roth IRA conversion.

4. Recommend recurring grants for unrestricted use

Predictable and steady streams of revenue help charities solidify their finances and effectively plan and deliver their services, especially during difficult times. Donors can provide ongoing revenue through a series of recurring grants awarded indefinitely or over a defined period of time. At Schwab Charitable, the number of scheduled, recurring grants more than doubled in the past two years.

In addition, donors who recommend grants without specifying or designating a purpose or program afford charities greater flexibility in fulfilling their mission. The pandemic highlighted the importance of such flexibility and Schwab Charitable donors responded during fiscal year 2021 with a 48% increase in the number of unrestricted grants compared to the previous fiscal year.

Favorable Giving Environment

The S&P 500® index roughly doubled between 2016 and 2021, and many investors have highly appreciated non-cash assets in their portfolios, including private business interests and real estate investments. Existing tax laws offer incentives to donors who contribute appreciated non-cash assets held more than one year. And donors are interested in these benefits: inquiries about non-cash asset contributions received by Schwab Charitable in the first half of this year rose 120% over the same period last year.

Annual income tax deduction limits for gifts to public charities, including donor-advised funds, are 30% of adjusted gross income (AGI) for contributions of non-cash assets held more than one year and 60% of AGI for contributions of cash. Donation amounts in excess of these deduction limits may be carried over up to five tax years.

There are also significant tax incentives for charitable giving through provisions in the CARES Act that have been extended through the end of 2021. Individuals taking the standard deduction can claim an additional deduction of up to $300 for cash contributions directly to operating charities, while married couples filing jointly can claim up to $600.

Donors who itemize deductions may elect a CARES Act 100% of AGI deduction limit for cash contributed directly to operating charities, and deduction amounts above this limit may be carried over for up to five tax years. In addition, the annual deduction limit for cash contributions by a business stays at 25% of taxable income instead of reverting back to the 10% cap.

Note that CARES Act incentives are not applicable for contributions to donor-advised funds, supporting organizations, or private foundations.

What Donors Can Do Next

Schwab Charitable offers tools, information, and other resources available online to inform and guide donors as they consider their giving for the remainder of 2021. Creating a strategic giving plan may be a good place to start.

The Schwab Charitable Giving Guide is a powerful new tool designed to help donors create and manage a thoughtful giving plan, no matter where they are in their philanthropic journey. Organized into five sections and 13 chapters, the Giving Guide allows donors to delve into topics most meaningful to them and answer guiding questions that will help inform their giving strategy. By engaging in activities throughout the Giving Guide, donors can generate a plan that may be reviewed with family and advisors and help maximize their giving power, particularly during these unprecedented times.

For additional resources, donors may review the following related information:

Individuals considering charitable tax strategies highlighted above should consult with their tax and legal advisors before taking action. Donors and advisors may also call us at 800-746-6216 with questions or with a request to have one of our charitable specialists participate in a philanthropic conversation.

*Operating charities, or qualifying public charities, are defined by Internal Revenue Code section 170(b)(1)(A). Donor-advised funds, supporting organizations, and private foundations are not considered qualifying public charities.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc., a subsidiary of The Charles Schwab Corporation.

Schwab Charitable™ is the name used for the combined programs and services of Schwab Charitable Fund™, an independent nonprofit organization. Schwab Charitable Fund has entered into service agreements with certain subsidiaries of The Charles Schwab Corporation.

Schwab Charitable Fund is recognized as a tax-exempt public charity as described in Sections 501(c)(3), 509(a)(1), and 170(b)(1)(A)(vi) of the Internal Revenue Code. Contributions made to Schwab Charitable Fund are considered an irrevocable gift and are not refundable. Please be aware that Schwab Charitable has exclusive legal control over the assets you have contributed.

Although every effort has been made to ensure that the information provided is correct, Schwab Charitable cannot guarantee its accuracy. This information is not provided to the IRS.

A donor's ability to claim itemized deductions is subject to a variety of limitations, depending on the donor's specific tax situation. Donors should consult their tax advisors for more information.

Schwab Charitable does not provide specific individualized legal or tax advice. Please consult a qualified legal or tax advisor where such advice is necessary or appropriate.

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