We noted in a 2016 charitable giving article that Americans gave more to charity the previous year than they ever had before—$373 billion! Fast forward a few years and the totals have grown even higher. According to Giving USA, Americans gave an estimated $449 billion to charity in 2019.
Not surprisingly, philanthropy is a major goal for many of our clients. The Charitable Planning section in our Planning Commentary library highlights several philanthropic planning tools, including donor-advised funds (DAFs), IRA Qualified Charitable Distributions (QCDs), and charitable trusts, among others.
This article highlights proposed legislation that may impact one of these more popular charitable giving tools while also providing concrete ways to give to charity in 2021, regardless of pending legislation.
The Accelerating Charitable Efforts Act bi-partisan legislation was introduced in June of this year with the stated purpose of reforming private foundations and getting charitable dollars out of donor-advised funds and into the hands of “working charities.” Because donor-advised funds are much more common, we will focus on proposed changes to this giving vehicle. The effective date for changes related to this bill are for tax years after December 31, 2021.
A donor-advised fund enables donors to make tax-deductible donations in the current tax year, while having the flexibility to direct grants to charities in the current tax year as well as in future tax years. Under current law, donations can essentially stay in a DAF indefinitely.
There are policymakers who believe that DAFs (and private foundations) are not “working charities” but rather conduits for charitable giving because they are not producing charitable goods and services themselves. Some policymakers also believe that the timing of the charitable goods and service delivery should more closely match the timing of the contributing taxpayer’s charitable tax deduction.
The proposed legislation creates three types of DAFs: 15-Year DAFs, 50-Year DAFs, and Community Foundation DAFs. The proposed 15-Year DAF would require contributions to be distributed within 15 years of the funding date. The proposed 50-Year DAF would not permit charitable deductions until contributions have been distributed to a working charity. The penalty for noncompliance is severe. If either DAF does not distribute contributions within the mandated timeframe—15 and 50 years, respectively—there would be a 50% penalty on the undistributed contribution amount. Contributions must therefore be tracked, which would lead to greater administrative costs.
Please remember that this is not law, but only proposed legislation.
2021 Charitable Planning
Legislation passed in December of 2020 extended many of the charitable-giving tax incentives enacted in March of 2020’s pandemic-driven CARES Act. Initially designed as 2020 incentives, these charitable giving techniques can also be implemented in 2021:
Cash contributions (personal): Prior to the CARES Act, individual taxpayers could deduct charitable cash contributions up to 60% of their adjusted gross income (AGI). Last year, and now this year, donors can deduct cash contributions up to 100% of their AGI. Note that taxpayers must itemize to claim this deduction and must indicate the specific contributions to be included under this special CARES Act rule.
Cash contributions (business): The CARES Act also raised the AGI limit for corporate donors from 10% of AGI to 25% of AGI.
Cash contributions for taxpayers claiming the standard deduction: Not all taxpayers itemize. The CARES Act allowed donors who claim a standard deduction to take an additional deduction of up to $300 for cash contributions to charity. This was the limit for single or joint filers. In 2021, single filers can still take the $300 deduction, while joint filers can deduct up to $600.
IRA distributions: IRA owners over the age of 70 ½ may still donate up to $100,000 annually from their IRAs directly to qualified charities via Qualified Charitable Distributions. QCDs are not included in taxable income. However, for the remainder of this year, IRA owners can ramp up charitable giving without consideration for the QCD minimum-age threshold of 70 ½ or the QCD maximum $100,000 annual giving limit. IRA owners can take a large IRA distribution to themselves, donate that cash to charity, and then utilize the previously discussed 100% of AGI deduction for charitable cash contributions to offset the taxable IRA distribution. This strategy is designed for taxpayers who are charitable AND interested in reducing their taxable estate. Note that IRA owners should be over the age of 59 ½ to avoid the 10% early withdrawal penalty and should have other assets to draw upon for retirement spending before implementing this 2021 strategy.
Navigating proposed legislation can be overwhelming. Please know your advisors at Bragg are paying attention and are prepared to share relevant changes when these proposals become law. Until then, due to parts of last year’s COVID-related legislation being extended, there are concrete ways to give to charity in 2021. Please contact us to discuss your philanthropic goals. As always, thank you for choosing Bragg Financial Advisors.
This information is believed to be accurate but should not be used as specific investment or tax advice. You should always consult your tax professional or other advisors before acting on the ideas presented here.