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Charitable Giving

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Maximize Your Giving and Minimize Your Taxes

The end of the year is quickly approaching, which may prompt a review of any final tax planning strategies to employ before December 31. The fall and winter holiday season also turns our minds to gratitude and giving. Perhaps surprisingly, these year-end considerations are not mutually exclusive.

To promote charitable giving, the IRS offers tax deductions for certain charitable donations. The most straightforward tax benefit is an itemized deduction of the amount of any cash donations to a qualifying charitable organization, up to 60% of the taxpayer’s Adjusted Gross Income for the year (with a five-year carryover allowed). If you itemize deductions, this is an easy deduction to claim and one you are probably already aware of.

But tax-aware charitable giving strategies don’t end there. For example, a special above-the-line deduction (for non-itemizers) was created just for 2020-21 for any taxpayer to deduct cash donations up to $300 for single filers or $600 for married filing jointly.

Let’s look at three additional options to maximize your giving while minimizing your taxes.

1. Qualified Charitable Distributions 

A qualified charitable distribution (QCD) is a direct transfer from your IRA (traditional, rollover, inherited, SEP, or SIMPLE) to a qualified charity. Several attractive benefits come with a QCD:

  • First, a QCD counts toward your annual required minimum distribution (RMD).
  • Second, the amount of a QCD is excluded from your taxable income. So, rather than taking a withdrawal from your IRA, having taxes withheld, and then writing a check to your favorite charity, consider making a direct transfer from your IRA to the charity. You can send the full amount to charity without having taxes withheld on the distribution.
  • Third, the tax-exemption of a QCD doesn’t require that you itemize your deductions. Normally, to get a tax deduction for charitable giving, you need to itemize your tax deductions rather than use the standard deduction. But a QCD is tax-exempt whether or not you itemize – allowing you to take the higher deduction (whether that is the standard or itemized) and get a tax benefit for your charitable contributions either way.

To be eligible for a QCD, you must be 70 ½ or older and SEP or SIMPLE IRAs must be inactive. QCDs are limited to $100,000 per year per person and may be further limited if you are still contributing to the IRA. To count toward the current year’s RMD, the funds must be transferred from the IRA by the RMD deadline (usually December 31). 

2. Donor-Advised Funds
A Donor-Advised Fund (DAF) is a fund you establish to set aside cash and other assets for charitable giving. You receive a tax deduction for the amount given to the fund in the year contributed, and the assets are available for you to donate to specific charitable organizations at any time. 

Donations of appreciated assets, such as stock or real estate, can be given to the DAF without paying capital gains taxes. Any further growth of assets in the DAF is not taxable to you since it is already irrevocably reserved for charitable gifts.

A DAF can be used in a “batching” strategy, where the tax-deductible contribution to the fund happens in one year and then donations to your chosen charities subsequently happen on whatever timeline you wish. You can fund a batch of charitable gifts in one single tax-deductible contribution. This is a great tax-mitigating tool for a particularly high-income year and a useful ongoing strategy to maximize the tax benefits of your charitable giving. 

3. Charitable Remainder Trusts

Charitable Remainder Trusts allow you to make partially tax-deductible contributions to the trust while achieving a two-fold goal: providing an income stream to yourself or another beneficiary and giving to a charitable organization.

There are two types of Charitable Remainder Trusts: a Charitable Remainder Annuity Trust (CRAT) and a Charitable Remainder Unitrust (CRUT).

  • A CRAT distributes a fixed amount to the chosen beneficiary (yourself or someone else) each year. At the end of the trust term (no more than 20 years), the remainder of the trust goes to your chosen charitable organization(s). Additional contributions cannot be made once the CRAT is established.
  • A CRUT distributes a fixed percentage of the trust assets to the beneficiary, with the remainder going to your chosen charitable organization(s). Additional contributions can be made over the life of a CRUT.

The tax deduction of contributions to a Charitable Remainder Trust is based on the type of trust, the term of the trust, the projected income payments, and the IRS interest rate assumptions. You can combine a Charitable Remainder Trust with a Donor-Advised Fund to offer more flexibility. 

CARES Act Enhancements

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) added some additional tax incentives for charitable giving in tax years 2020 and 2021. The maximum allowed deduction for cash contributions increased to 100% of AGI, with a five-year carryover allowed. The deduction allowed for corporations increased to 25% of taxable income. As mentioned previously, a special above-the-line deduction (for non-itemizers) was also created for any taxpayer to deduct cash donations up to $300 for single filers or $600 for married filing jointly.

Family, corporate, and private non-operating foundations are excluded from these enhanced benefits, along with supporting organizations under Section 509(a)(3) and donor-advised funds. These enhancements only apply to cash contributions. Contributions of appreciated assets (like stock or real estate) are subject to the same prior limit of 30% of AGI.

Conclusion

Immediate action items we recommend:

  • If you gave to charity in 2021, make sure you take the special above-the-line deduction (up to $300 for single filers and $600 for married filing jointly).
  • If you are over age 70 ½ and donating to charity, talk with your advisor about making Qualified Charitable Deductions from your IRA.
  • If you had unusually high income this year and/or if you are consistently giving large amounts to charity, talk with your advisor about setting up a Donor-Advised Fund.

Charitable giving is a fulfilling practice and an important piece of many financial plans. Current tax law incentivizes charitable gifts, and thus, skilled tax planning can help you maximize what you can give. Talk to your advisor or tax professional to see if any of these charitable giving strategies could help you achieve your financial goals.

Kirsten C. Cadden, CFP®

Associate Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

What to Expect For Expense Deductions if You’ve Taken a Paycheck Protection Program Loan

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Earlier in 2020 the “Paycheck Protection Program” was passed, which allowed for much needed aid for struggling small businesses during the Coronavirus pandemic. One of the main features of the Paycheck Protection Program was the ability to potentially have your loan amount forgiven, tax free. 

While this is a great benefit, one of the many grey areas that arose was whether or not expenses that were paid by the business using PPP funds were eligible for a tax deduction. While the funds may have been spent on business related items that would normally be tax deductible, it was unclear whether this same treatment would be available for those who received tax free PPP loan forgiveness.

On November 18th, 2020 the IRS and Treasury Department Secretary Steven Mnuchin issued some additional guidance to assist in clearing up some of the confusion. The statement issued expressed that “since businesses are not taxed on the proceeds of a forgiven PPP loan, the expenses are not deductible. This results in neither a tax benefit nor tax harm since the taxpayer has not paid anything out of pocket.” It then went on to state that “if a business reasonably believes that a PPP loan will be forgiven in the future, expenses related to the loan are not deductible, whether the business has filed for forgiveness or not.”  Therefore, they encouraged businesses to file for forgiveness as soon as possible. In the case where a PPP loan was expected to be forgiven, and it is not, the statement outlined that businesses will be able to deduct those expenses.

As you can imagine, this was not the desired outcome for many business owners. Currently there is a fight within Congress, the Treasury Department, as well as in the business and tax communities regarding this interpretation of the PPP language. Many in Congress from both sides of the aisle argue that this interpretation of the language in the Bill does not align with Congressional intent. For example, Senate Finance Committee Chairman Chuck Grassley (R-Iowa) and Ranking Member Ron Wyden (D-Ore.) released a joint statement expressing their opinion that the expenses should be considered deductible. With Congress currently negotiating both a spending bill and second stimulus package, many hope the rules around deductibility of these expenses will be specifically outlined soon.

If you are a business owner impacted by this, unfortunately the best course of action is to remain patient with hopes of some additional Congressional action coming shortly. As always with Congress, it is unclear when they will act and what will be in the final version of the Bill. Ideally, this will be addressed prior to Congress’ holiday adjournment on December 18th, 2020. For the time being we are forced to assume that these expenses will not be deductible until additional Congressional action says otherwise. As always, when it comes to anything tax-related, your best course of action is always to work directly with your CPA and tax professional.

Source – https://home.treasury.gov/news/press-releases/sm1187

Source – https://www.jdsupra.com/legalnews/the-irs-forgiven-ppp-loans-and-business-88352/#_edn25

Source- https://www.finance.senate.gov/chairmans-news/grassley-wyden-treasury-misses-the-mark-on-ppp-loan-expense-deductibility-guidance

Justin Rucci, CFP®

Wealth Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

Less SALT for Taxpayers to Subtract

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Less SALT for Taxpayers to Subtract

What does the new federal cap on state and local tax deductions mean for you?

Have you routinely itemized your federal tax deductions? In 2018, you may decide to take the standard deduction instead. One possible reason: the new limit on state and local tax deductions set by the federal government.

The SALT deduction is now capped at $10,000. The standard deduction is now $12,000 ($24,000 for a married couple). So, your incentive to take the SALT deduction might be gone. Even if you live in a wealthy suburban area, a high-tax state, or a state that charges no income tax, you might not see any point in claiming it. The Tax Policy Center estimates that 3.5 million households will quit itemizing in 2018 simply because of this one revision to the Internal Revenue Code.(1,2)

High-earning households have usually claimed SALT deductions. Research from the TPC’s Briefing Book shows that 93% of households earning $200,000-$500,000 took the deduction in 2014. In fact, more than 40% of taxpayers in Connecticut, Maryland, and New Jersey made use of the tax break that year. In 2015, the average SALT deduction for taxpayers in California and New Jersey was around $18,000; in New York, it topped $22,000.(1,3)

The change may not affect some taxpayers. The TPC projects that households earning $150,000 or more could be hit hardest by this, but it also believes that just 40% of those households will actually see higher taxes as a result of the SALT cap. Why? Many households earning between $200,000-$500,000 will be subject to the Alternative Minimum Tax, so they will not benefit from a SALT deduction. The average taxpayer in the top 1%, though, is positioned to see a federal tax increase of about $30,000 due to the new deduction limit.(2)

Some state governments are crafting responses. In California’s state legislature, a bill proposes the creation of a new state charity, the California Excellence Fund, to which taxpayers could pay some of their state taxes. Residents could contribute the portion of their state tax bill exceeding the $10,000 federal cap to the proposed fund, and all their SALT taxes would be deductible. (To help facilitate this, these taxpayers would need to meet with their CPA or tax preparer in December rather than spring.)(1)

New York state lawmakers are also advancing a plan to create a new state charity, in the vein of the California bill. Maryland state legislators are proposing something similar, whereby taxpayers could make charitable donations to public schools once over the $10,000 SALT deduction limit.(1)

Another idea making the rounds in New York’s state legislature: have workers accept a pay cut in exchange for a SALT break. Employers would shoulder a new statewide payroll tax, and presumably reduce employee pay – but in compensation, workers would get a wage credit equivalent to their pay cut. This way, the worker’s pay would stay the same. For example, an employee could see a $10,000 salary cut, but pick up a $10,000 tax-deductible wage credit at the same time.(1)  

Will the $10,000 ceiling on the SALT deduction rise in future years? Unfortunately, no. It is not indexed for inflation.(2)

Should you still itemize in 2018, even with the new SALT deduction cap? You should make that decision (and others) with input from the tax preparer you know and trust. There are many variables that can potentially impact your federal tax return, and you will want to take a thorough look at them before you make a move.  

Contact Us

 

Cary FacerCary Facer
Founding Partner
Warren Street Wealth Advisors

Cary Facer is an Investment Advisor Representative of Warren Street Wealth Advisors, a Registered Investment Advisor. Information contained herein does not involve the rendering of personalized investment advice, but is limited to the dissemination of general information. A professional advisor should be consulted before implementing any of the strategies or options presented.

This material was prepared by Marketing Pro, Inc. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Past performance may not be indicative of future results. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may materially alter the performance, strategy, and results of your portfolio. Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results.Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. Nothing in this commentary is a solicitation to buy, or sell, any securities, or an attempt to furnish personal investment advice. We may hold securities referenced in the blog and due to the static nature of content, those securities held may change over time and trades may be contrary to outdated posts.


Citations
1 – cnbc.com/2018/01/23/how-these-states-are-rebelling-against-the-new-gop-tax-code.html [1/23/18]
2 – forbes.com/sites/beltway/2017/12/21/what-the-tax-bills-curbs-on-the-salt-deduction-would-mean-for-itemizers/ [12/21/18]
3 – taxpolicycenter.org/briefing-book/how-does-deduction-state-and-local-taxes-work [2/19/18]