Play for the Win-Win: Help a Charity While Benefitting Yourself

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Charitable giving helps to improve social well-being by supporting a broad range of areas including education, scientific research, alleviation of poverty, and others. To encourage donations, the federal government makes certain charitable contributions eligible for tax benefits. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) increased certain charitable donation deductions, while the CARES Act extension extended some increased deductions through the end of 2021.

Now is a good time to evaluate your 2021 charitable donations in light of the increased deductions.

Extended Temporary Tax Benefits for Corporations

Through the end of 2021 C Corporations have an increased deduction limit and can elect to deduct charitable cash contributions to eligible charities up to 25% of the Corporation’s taxable income. Corporations must elect the increased limit for each contribution, otherwise the contribution will be subject to the 10% deduction limit.

Extended Temporary Tax Benefits for Individuals

Through the end of 2021 itemizing and non-itemizing individuals can utilize the extended temporary tax benefits for certain charitable deductions.

Itemizing individuals can usually deduct charitable cash donations up to 60% of their adjusted gross income (AGI). Through the end of 2021, however, itemizing individuals can elect to deduct charitable cash contributions to Qualified Charitable Organizations[1] up to 100% of their AGI. The 100% AGI deduction is reduced by other charitable deductions claimed in 2021, so that deductions do not exceed the individual’s AGI. Individuals may be able to carry over some of their excess deductions to each of the next five years. The increased election must be made for each qualified contribution on the individual’s 2021 income tax return, otherwise the 60% limit applies.

People who do not itemize can also enjoy a tax benefit from making charitable cash contributions to Qualified Charitable Organizations before December 31, 2021. Individual non-itemizers can deduct up to $300 of qualified contributions. Married individuals filing jointly can deduct up to $600.

Contributions that do not qualify:[2]

  • To supporting organizations
  • To donor advised funds
  • To private foundations
  • Carried forward from prior years
  • Most cash contributions to charitable remainder trusts
  • That are not in cash

Individual Income Tax Exclusion

The Qualified Charitable Distribution (QCD),[3] sometimes referred to as a Charitable Rollover or a Direct IRA Transfer, is not expiring. The QCD deserves some added attention; it a great way to do good while taking advantage of a tax benefit. A QCD does not qualify for a charitable deduction; even better it qualifies for a tax exclusion.

Traditional IRAs are funded with pre-tax dollars, meaning the money deposited into the traditional IRA has not been subject to income tax. Money in a traditional IRA is not subject to income taxes until distribution. Distributions from traditional IRAs are completely taxable. Required Minimum Distributions (RMD) must be taken from traditional IRAs by specific deadlines.[4]If the RMD is not taken by the deadline, the unwithdrawn RMD is taxed at a rate of 50%.

A QCD allows individuals who are 70 ½ or older to direct their IRA holder[5] to make a direct gift (donation) of up to $100,000 to a Qualified Charitable Organization. The individual can then exclude the direct gift from their annual income.

The QCD can be used to satisfy the individual’s required minimum distribution (RMD) in whole or in part. If the IRA owner is required to take an RMD of $75,000, they can make a direct QCD of $75,000 or a lesser amount. The amount paid to the Qualified Charitable Organization will offset any remaining RMD for that year.

Direct gifts made before a person’s RBD can reduce future RMDs. The QCD is available once a person turns 70 ½ and reduces the value of the IRA used to calculate RMDs.

A QCD exclusion lowers the individual’s taxable income, which in turn reduces the amount of social security benefits that are subject to income tax. A QCD exclusion can also reduce Medicare surtaxes by keeping taxable income under the Medicare surtax threshold.

While you can’t have your cake and eat it too, you can enjoy sharing your cake while saving tax dollars.

For additional guidance on the availability of charitable deductions contact your attorney and your tax advisor.

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[1] https://www.irs.gov/pub/irs-pdf/p526.pdf at page 2

[2] See https://www.irs.gov/forms-pubs/about-publication-526 for additional information

[3] https://www.irs.gov/pub/irs-pdf/p590b.pdf at page 14

[4] The Internal Revenue Code sets a Required Beginning Date (RBD) for people to begin taking required minimum distributions (RMDs) from their IRAs. The amount of the RMD is based on the value of the IRA on December 31 of the prior year and IRS life expectancy of the IRA owner.

[5] Other than a SEP or Simple IRA.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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