By Brian Ellenbecker, CFP®, EA®, CPWA®, CIMA®, CLTC®
2020 has been a unique year in many aspects. COVID-19 has created many problems, including delays in processing certain transactions. As we approach year-end and you think about any final charitable donations you want to make for this tax year, it’s important to have a plan in place for making a timely donation. Be sure that you make those donations early enough so that any delays in processing the donation do not impact your ability to deduct it in 2020.
If you plan to send your donation in the mail via check, to count for 2020, it must be postmarked by December 31. The postmark rule only applies to US mail—not to other delivery methods, such as UPS or FedEx.
If you pay your donation by debit or credit card, the transaction is official once the charge is made.
Donations of Property
If you donate property, such as clothes, furniture, artwork, etc., the donation must happen on or before December 31. If the item you are donating has a title or deed, that transfer must also occur by December 31.
For larger donations, consider donating appreciated securities in lieu of cash. Not only do you potentially receive a charitable deduction, but you also avoid paying capital gains from the sale of the security by transferring it in-kind. The charity must receive the stock by December 31.
If you plan to donate stock from your Schwab account managed by Shakespeare, please let us know by December 15. This will ensure we have enough time to process our request.
Qualified Charitable Distributions
If you are over 70 ½, consider making charitable donations from your IRA using a Qualified Charitable Distribution (QCD). You can transfer up to $100,000 per year to an eligible charity. While a QCD does not generate a charitable deduction, you do not have to report the income. This is a great option for people to still get a tax benefit even though they are not able to itemize deductions.
The deadline for making a QCD varies.
- A QCD must be received by the charity by December 31 if the check is mailed from the IRA custodian directly to the charity.
- If you have a checkbook for your IRA and write a check, the check must be CASHED by December 31. If you plan on making a year-end QCD by writing a check, be sure to leave plenty of time to allow the charity to cash the check. You may even want to contact someone at the charity to notify them of your donation and remind of this unique rule.
Deducting your Gift
Charitable deduction rules can be very complicated, and you should work with your tax advisor to ensure you are maximizing the tax benefit of any donation. Here are some key items to keep in mind:
- Typically, you must itemize deductions in order to qualify for a charitable deduction. In 2020, you may deduct up to 100% of your adjusted gross income (AGI) for cash gifts made to public charities. The limit is still 60% of AGI for donations to donor advised funds and supporting organizations. Donations of appreciated securities to a public charity are limited to 30% of AGI.
- If you do not itemize, you may deduct up to $300 as an “above-the-line” deduction for charitable gifts.
- To deduct a charitable gift, adequate documentation must be kept.
- For cash donations, the donor must maintain a bank record or written communication from the donor showing the name of the donee, the date of the contribution and the amount of the contribution.
- For donations of property, additional documentation may be required.
- Consider a deduction bunching strategy. Through a technique known as bunching, a taxpayer can keep their total expenses the same, but increase their total tax deductions over multiple years. Under bunching a taxpayer delays a year’s worth of charitable giving from one year to the next, but then gives double the amount to charity in that second year. The total giving stays the same, but the total tax deductions claimed are increased.
Donor Advised Funds
A donor advised fund (DAF) is a charitable investment account used for the sole purpose of supporting charitable organizations you care about. When you contribute cash, securities, or other assets to the DAF, you are generally eligible to take an immediate tax deduction. The funds in the DAF can then be granted to charity over time at your discretion.
A DAF can be a great tool for someone who is bunching deductions. You are able to receive an immediate deduction for all contributions (up to limits) while distributing the funds to charity over time.
Donor advised funds are a flexible, easy to administer and a relatively inexpensive way to leverage your charitable giving over time. They have become a very popular giving tool for those reasons.
If you have already established a Donor Advised Fund through Schwab, consult Schwab Charitable’s 2020 Year-End Contribution Guidelines for important deadlines.