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ACM Journal - Investment Management
12 Oct

Chris’s Corner – Q3 2020 Newsletter

As we enter the final quarter of 2020 many of us start to think of year-end charitable giving. Despite a difficult year for the economy and wild stock market swings, preliminary data from Fidelity and Giving USA suggest that Americans have stepped up their philanthropy, increasing donations by almost 16% so far in 2020. Perhaps that should not be surprising, as it turns out America is the most generous nation when it comes to charitable giving. Per Philanthropy Roundtable, annual private philanthropy in the U.S. represents almost 1.44% of GDP This is twice as high as the 0.77% recorded in Canada, nearly three times as high as the U.K.’s 0.54%, and in stark contrast to China’s 0.03%.

For those of you helping our country’s generous reputation, we thought we would highlight some of the more efficient ways to give, as well as recap some of the changes to relevant laws in 2020.

$300 Charitable Deduction

The CARES Act will allow taxpayers who donate to qualifying charities, but don’t itemize deductions on their tax return and who normally don’t receive a charitable tax benefit, to deduct up to $300 from gross income for 2020. So, save your receipts for any charitable contributions this year, even relatively small gifts.

Donating Appreciated Stock

Donating stocks (or mutual funds or bonds) that have appreciated in value and that you have held for more than one year directly to a charity is one of the most efficient ways to give. You receive the deduction for the full fair market value of the stock you donate but avoid realizing any capital gains on the appreciation, and subsequently avoid paying taxes on those gains. This is also an efficient way to manage a large, concentrated position in your portfolio or to lock in the results of a recent highflyer.

Qualified Charitable Distribution (QCD)

Although the CARES Act waived required minimum distributions for 2020, it did not remove QCDs as an option. QCDs allow IRA owners who are over 70 ½ to distribute up to $100,000 ($200,000 for married filing jointly) per year directly to a charity without it counting as income. Typically distributions from a qualified retirement account are taxed as ordinary income. However, QCDs are not considered income. This offers a couple benefits.

First, most taxpayers no longer itemize deductions because of the 2018 tax law change, and just use the standard deduction. This does not provide a tax benefit for charitable donations. However, QCDs are not counted as income, which results in a tax benefit for the amount of the donation. In addition, if your income is too high, you can avoid the loss of certain exemptions, deductions, and credits, or worse, it could trigger alternative minim tax, an increase in Medicare premiums, and the 3.8% surtax on net investment income. Because QCDs do not register as income, this approach can help avoid what could be significant tax pitfalls and offer benefits in excess of the value of the donation.

Donor Advised Funds (DAF)

A DAF can be thought of as a charitable investment account, for which the only purpose is supporting charitable organizations. You can contribute cash, stocks, or other assets to a DAF as a public charity. You do not retain legal control of these assets or any recourse to reclaim the assets, but many DAF sponsors will allow you to recommend grants to any qualifying charity over time. You receive an immediate tax deduction in the year that you gift the assets, but not again in the years they are disbursed. This can be an effective strategy if you are using the standard deduction and not receiving a taxable deduction for your charitable gifts. You can frontload a larger contribution in a given tax year, itemize your deductions on your tax returns, and still fulfil any charitable giving from the DAF over the upcoming years. As an added benefit, while your DAF is awaiting your disbursement instructions it can be invested and continue to grow.

There are many nuances to optimizing your charitable giving strategy. Feel free to contact us to discuss your plans.

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