Charitable Planning Strategies High-Net-Worth Individuals Need to Know for Year-End Tax Planning

This year has a few charitable tax law changes unique to 2021. We have compiled our top charitable tax planning ideas you may want to consider implementing this year before December 31st.

1.         Take advantage of the higher limit this year. 2021 has an increased adjusted gross income (AGI) limitation on cash charitable contributions, allowing you to deduct charitable contributions up to 100% of your AGI. Any contributions over 100% of your AGI will be carried forward for use in a future year. Non-cash contributions made in 2021 will not qualify for the increased limit but can be claimed under the normal limits.

In addition, for those taxpayers who take the standard deduction, there is a $600 maximum “above-the-line” deduction allowed for married joint filer taxpayers in 2021 ($300 for single). To qualify for this deduction, you must have made cash donations to a qualifying charity.

Contributions made to donor-advised funds or private foundations do not qualify for either of the above 2021 deductions but can be deducted according to normal limits.

2.            Consider bunching charitable deductions in the current year with a donor-advised fund, so you increase your charitable deduction and therefore your itemized deductions above the standard deduction. This strategy allows you to “bunch” your contributions into one year, where you benefit from itemizing in that year and then take the standard deduction in the other years. You can donate the cash or, even better, appreciated stock, into a donor-advised fund and receive the charitable deduction, then use the funds to donate to a charity at a later time. This would allow you to make a large, single-year contribution to maximize your tax deduction. The benefit would be that you can deduct the charitable contribution this year and allocate charitable funds from the donor-advised fund to individual charities in later years.

3.         Consider making 2021 charitable donations directly from your traditional IRA if you are over retirement age 70 ½. These donations are not included in your gross income or as an itemized deduction. It may be more beneficial to do this now since you will be depleting your IRA balance before tax rates most likely increase. the contribution is neither included in your gross income nor deductible as an itemized deduction and the amount of the qualified charitable distribution reduces the amount of your RMD, which can result in tax savings.

Be sure to work with your advisers now to evaluate your tax situation and take advantage of some of these strategies before December 31, 2021. Taxpayers should also be aware that the Build Back Better Act, which recently passed in the House, is currently making its way through the Senate and includes changes to tax law that could begin soon. Stay tuned.

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