By Ralph Levy
In the October 2021 issue of The Observer, I wrote about how three of the proposed changes in federal tax laws would affect charitable giving. At the time of that article, I assumed that Congress would soon pass new federal legislation that would contain several federal tax changes that would become effective on January 1, 2022, in order to help pay for significant investments in physical and human infrastructure included in the new laws. Much to my surprise (and in all likelihood to the surprise of President Biden), this legislation was not enacted last year nor is it certain that any legislation of the type originally being considered will be enacted in the near future. What impact will this significant change (i.e., that no federal tax law changes are imminent) have as we consider plans for 2022 charitable giving? Three strategies designed to maximize the benefits of charitable giving come to mind.
Strategy #1: Take advantage of Qualified Charitable Distributions
Individuals who must take required minimum distributions (RMD) from IRA's and other retirement plans and who have attained age 70½ may elect for the plan administrator to pay all or a portion of the amount otherwise distributable to them directly to charities as a qualified charitable distribution (QCD). Amounts paid as QCDs are not included in taxable income of the IRA owner or the retirement plan beneficiary but count toward the amount of RMD the donor is required to take each year. Also, the amounts paid as QCDs are not included in taxable income of the donor and as a result, the donor cannot claim a charitable deduction for the amounts paid directly to the charity.
Strategy #2: Fund charitable donations with highly appreciated assets
Despite COVID, the stock market experienced significant gains during 2021. As a result, individuals who own highly appreciated publicly traded stocks and bonds may want to consider donating these stocks and bonds as "in kind" donations to charities rather than making cash donations. By doing so, the donor is entitled to claim a charitable deduction for the fair market value of the securities donated but can avoid the capital gains taxes that would have been incurred if the donor had first sold the securities and then donated the proceeds of the sale to charity.
Strategy #3: Plan for the "Double Donation"
In order to itemize deductions for federal income tax purposes in 2022, married taxpayers who file joint tax returns must have at least $25,900 of itemized deductions (1/2 that amount, or $12,950 for single taxpayers). As a result, it may make sense for donors to "double up" on charitable deductions every other year. An example would be Mort, a single taxpayer, who has $9,000 of real property taxes on his residence and who regularly makes $5,000 of charitable donations to the Jewish Federation each year. Mort may want to consider donating $10,000 in December, 2022 and advise the Jewish Federation that the "extra" $5,000 donated in December, 2022 is in lieu of his "normal" 2023 $5,000 donation. With this strategy, Mort can claim $19,000 of itemized deductions in 2022 (just over $6,000 above the $12,950 2022 standard deduction amount) and roughly $13,350 as the standard deduction for 2023 ($12,950 increased by an assumed $400 inflation adjustment for 2023). If Mort had contributed $5,000 in each of December, 2022 and in January, 2023, his $14,000 of itemized deductions in 2022 and 2023 would have generated only just over $1,000 in "extra" itemized deductions above the standard deduction amount for 2022 and less than $1,000 in extra itemized deductions for 2023.
So, for now consider these three strategies and watch for future federal tax law changes that could affect charitable giving. Especially considering the upcoming mid-term elections, we know that one assumption will never change- that federal tax law changes of some type will take place. What we do not know is what type of changes will take place, when they will take place and which types of taxpayers will be affected by the changes (either positively or negatively).
Ralph Levy is a member of the Jewish Federation Professional Advisory Council (PAC). For more information about the PAC, please contact Shannon Small, Assistant FRD Director and Foundation Director at firstname.lastname@example.org."