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Giving Now – Making A Difference During COVID-19 with Tax-Wise Contributions

Reassess giving strategies to make an immediate and tax-efficient impact.

Contributions During COVID-19

Living in a global pandemic changes everything, including the urgency of the work done by many nonprofits and donors’ desire to help them do it. From donations of iPads for keeping isolated hospital patients in contact with family and friends to grants from donor advised funds that provide mobile x-ray scanners to struggling medical facilities, the generosity of individuals and families is strong. Estimates on Covid-19 related individual giving in the United States indicate it had already exceeded $1 billion by Late April [1].

Recent legislation, including the CARES Act, offers additional tax-efficient opportunities to encourage giving. Here are five aspects of the current tax provisions to consider as you choose how best to respond to this unprecedented medical, social and economic need. 

#1: Gifting now rather than through your estate

Like many individuals, you may have included charitable giving in your estate plan. Given the immediate need for donations, however, you may want to consider the added benefits of making lifetime gifts instead. Provided you have the financial capacity to make these contributions while maintaining your intended lifestyle, these immediate gifts offer the added advantage of allowing you to see the impact of your donation. You will also have the benefit of a current income tax deduction, rather than future tax deductions for your estate. 

#2: Contributing cash proceeds from tax loss harvesting

In recent years, as the markets have risen, lifetime gifts have centered on gifting appreciated marketable securities. The recent market volatility, however, opens the door to a different approach. If you have losses in securities, you may want to consider harvesting those losses to offset gains from other securities to reduce your overall gains taxes. If you then contribute the cash proceeds from your sales to charity, you will be able to claim a charitable income tax deduction as well.  This may be more beneficial to the charity since cash gifts are easier for them to receive and quickly put to work than marketable securities. In addition, the income tax deduction ceiling on cash gifts is higher than for gifts of property. In fact, for 2020, an individual may deduct a cash gift to a qualifying charity up to 100% of taxable income. However, the increased AGI (of either 60% every year or 100% in 2020) is available exclusively on cash contributions and will, if taken, force deductions for non-cash contributions into being subject to a 5-year carryover. 

#3: Adjusting qualified charitable distributions (QCDs)

The CARES Act waives required minimum distributions (RMDs) from retirement accounts in 2020. If you usually make qualified charitable distributions of up to $100,000 of your RMD, you may want to reevaluate the optimal tax outcome. Though you may still make a QCD, you are not required to take a RMD. If, however, you decide not to make a QCD, you may want to consider other funding sources, such as grants from a previously funded donor advised fund. 

#4: Giving through a donor advised fund

Donor advised funds (DAFs) can be a ready source of immediate giving. Contributions offer the benefits of an income tax deduction in the year they are made and, when allowed to accumulate, serve as a rainy day fund for future grants. Executives who ordinarily make charitable gifts from their bonus income may use their DAF as an alternative source of grants in the face of compensation reductions. For retirees, funds accumulated in a DAF can now fund grants to replace their annual qualified charitable distribution from a retirement account (see above), keeping funds flowing to a specified charity in this time of need. 

#5: Pairing an IRA conversion with a contribution

Individuals with large traditional IRAs who want to diversify their income for retirement can convert their traditional IRAs into a Roth IRA. Conversions are generally more advantageous when asset values are lower, which may currently be the case given recent market volatility. Although the conversion results in current year taxable income, in 2020 a donor can make deductible cash contributions to a qualifying charity and elect to deduct up to 100% of their otherwise taxable income, which could offset the income tax entirely. 

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Conclusion

In this time of global need, the urge to do something is both overwhelming and empowering. Tax considerations are seldom the reason we give, but they can be aligned with and sometimes even enhance our giving. There are many ways to help those impacted by this unprecedented pandemic and advance your financial wealth plans. 

Disclosures

This information is not intended to be and should not be treated as legal, investment, accounting or tax advice and is for informational purposes only. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal, accounting or tax advice from their own counsel. All information discussed herein is current only as of the date appearing in this material and is subject to change at any time without notice.

 

[1] “Covid-19 Exposes American Philanthropy’s Strengths and Weaknesses.” The Economist. The Economist Newspaper, April 27, 2020. Retrieved 5/20/2020: https://www.economist.com/united-states/2020/04/27/covid-19-exposes-american-philanthropys-strengths-and-weaknesses.

 

 


© 2020 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A. Incorporated with limited liability in the U.S.

This information is not intended to be and should not be treated as legal, investment, accounting or tax advice and is for informational purposes only. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal, accounting or tax advice from their own counsel. All information discussed herein is current only as of the date appearing in this material and is subject to change at any time without notice.  

Suzanne L. Shier

Wealth Planning Practice Executive & Chief Tax Strategist/ Tax Counsel
Suzanne L. Shier is the Wealth Planning Practice Executive and Chief Tax Strategist/Tax Counsel for Wealth Management at Northern Trust and serves on the Wealth Management Operating Group.

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