By Paige Goepfert, Managing Director, Private Client Services, Andersen
During the last year and a half, high net worth taxpayers have shown an increased interest in charitable giving. The increase may have been due in part to the Coronavirus Aid, Relief, and Economic Security (CARES) Act which included a specific provision to encourage charitable giving during the COVID-19 pandemic. Previously, the Tax Cuts and Jobs Act (TCJA) capped the deduction for cash contributions to public charities at 60% of adjusted gross income (AGI). At the election of the taxpayer, the CARES Act raises that limit for “qualified charitable contributions” to 100% in 2020 and 2021. Qualified charitable contributions are defined as cash contributions made to public charities, other than donor advised funds (DAFs) and support organizations. Contributions to private non-operating foundation and split-interest trusts are also excluded from the qualified charitable contribution definition.
Individuals who donate cash or non-cash property to a qualified organization are entitled to a deduction on their individual income tax return if the individual is itemizing deductions. The tax impact of charitable giving can depend on a variety of factors including the value of the donated property, the type of property donated, the taxpayer’s adjusted gross income, and the type of organization the donation is made to. To that end, it is important for advisors to continue to set the stage for tax-aware giving and the need for integrated planning.
While calculating the deduction for the donation of cash is straightforward, several different percentages of AGI limitations can apply ranging from 20% to 60%, including gifts to DAFs and Private Foundations. If there are any excess contributions after considering the various limitations, the excess can be carried forward for up to 5 years.
If an individual takes advantage of the 100% AGI limitation increase, it is important to note that the qualified contributions in excess of the amount that can currently be deducted are carried forward for 5 years and are treated as contributions subject to the 60% limitation.
Individuals who are interested in making donations of cash and non-cash property should be aware of the ability to “stack” their charitable gifts. This stacking can be valuable for individuals who wish to donate long-term appreciated marketable securities, as well as offset most if not all their remaining AGI with additional contributions. (For the purposes of this column, stacking donations is different than bunching or bundling donations, as those latter two terms typically refer to combining several years of donations into one year.)
Here are two examples of stacking donations to provide a deduction of 100% of AGI in 2020 and 2021:
Option 1: Suppose a taxpayer has $1 million of AGI. They can donate up to $300,000 of appreciated marketable securities to a public charity and get a dollar-for-dollar deduction. They can then make an additional $700,000 qualified charitable contribution to a public charity, further reducing their AGI to zero.
Option 2: Same facts as above. Taxpayer can donate $600,000 of cash to a DAF and $400,000 cash to a public charity, reducing their AGI to zero.
Before the end of 2021, advisors should work with their clients to model the impact of stacking cash gifts on top of non-cash charitable contributions like long-term appreciated marketable securities, which can result in the donations providing a charitable deduction up to 100% of AGI. Although the up to 100% limit is only applicable for tax years 2020 and 2021, taxpayers can always take advantage of stacking donations but will need to understand the deduction limits that may apply.
At American Endowment Foundation, we look forward to helping donors and advisors determine the best strategies for their charitable giving. Please contact us or call at 1-888-966-8170 with any questions.
Paige Goepfert is a CPA and Managing Director for Andersen. She is a member of the Andersen Private Client Services team and works with ultra-high net worth families, family offices, and executives on tax planning and income tax compliance. Paige has over 16 years of experience in public accounting specializing in individual, fiduciary, and estate taxation. She is a member of AEF’s Council of Advisors.