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2020 has been a year unlike any other—with the COVID-19 pandemic bringing unprecedented health and economic challenges to communities around the country. The stock market, though, has thus far come through the crisis relatively unscathed. After a volatile spring, the market began ticking up again through the summer and fall—leaving intact many investors’ significant appreciation on assets they have held for a long time.
The challenge as you plan your end-of-year tax strategy? If you’re expecting to have a high-income year—due to a large bonus or equity compensation or because you will be realizing gains from long-term investments—you could be heading toward a bigger tax bill than you were expecting.
But good news: as you think about charitable giving this year, you might have additional opportunities to help reduce your taxes in 2020—while maximizing your support for your favorite nonprofits during this time of need.
Instead of selling your non-cash assets like stock and mutual fund shares and donating the after-tax proceeds, it may be advantageous to donate these assets directly to charity. You’ll get two significant benefits, as long as you’ve owned the assets for more than a year. You’ll generally be eligible to claim a tax deduction in the amount of the full fair market value, and neither you nor the charity will pay any taxes on the gain. Because of this, you will be able to give as much as 20 percent more to charity than had you sold the asset and donated the after-tax proceeds. You also can donate stock that has significantly appreciated, and then buy more of the same stock, essentially “resetting” the cost basis at a higher amount.
Does your company participate in long-term incentive plans? While equity awards can provide significant income, they can also create unexpected tax consequences once exercised or vested. Consider leveraging previous years’ vested shares or other long-term appreciated assets for charitable giving as a smart way to reduce your tax exposure.
A charitable gift that combines cash and long-term appreciated securities may create a larger deduction than contributing securities alone.
Donations of publicly traded stocks, bonds or mutual funds that you’ve held for more than a year are generally deductible at fair market value, and current year deductions can be in amounts up to 30 percent of your AGI.
Meanwhile, when you donate cash, generally you can give up to 60 percent of your adjusted gross income (AGI) and deduct the contribution in the current year. In 2020, though, Congress passed the Coronavirus Aid, Relief and Economic (CARES) Act in response to the COVID-19 pandemic. Under the bill, you can deduct cash contributions to qualifying organizations up to 100 percent of your AGI in 20201—a unique opportunity to benefit charities immediately while significantly reducing a high tax bill.
If you make contributions of both cash and stock, the IRS has an ordering mechanism in place to determine which deductions are taken first and to what extent. It’s also possible to carry forward any unused deductions for up to five years.
“If you’re having a high-income year, it is the time to make sure you’ve fully taken advantage of all possible deductions,” said Tony Oommen, vice president and charitable planning consultant at Fidelity Charitable. “For the charitably inclined, maxing out your deductions is a strategy that could make a lot of sense and is worth discussing with your tax advisor.”
Whether you choose to donate cash equivalents, stock or other appreciated assets, a donor-advised fund is a simple and efficient way to make a donation quickly and be eligible for a tax deduction this year. Rather than scrambling to write out checks or transfer stock to multiple charities, you can make a single donation to set up a donor-advised fund, like the Giving Account at Fidelity Charitable.
A donor-advised fund is a dedicated charitable account used for the sole purpose of supporting charities you care about. You become eligible for a tax deduction on contributions to Fidelity Charitable, which is a public charity. Then, you’re able to support any IRS-qualified public charity on the timetable that best suits you by recommending grants from the account to the charities you care about. The fund also can be invested for potential growth, possibly resulting in even more money for charity.
This can also be a great strategy for people who may be thinking about retirement. By front-loading giving to a donor-advised fund while you’re still in your high income-earning years, you’ll be able to both get additional tax savings when you need them—and pre-fund your charitable giving during retirement, when income may be lower.
It is also useful for anyone with a significant capital gains event or experiencing a high-income year and needing a little more time to decide which charities to support. “It is a great, great vehicle for the 99 percent of the population out there who do charitable gifting, and they make it very easy to gift,” said Elda Di Re—a partner at Ernst & Young with a focus on tax, financial and charitable planning—in an interview on PBS’s WealthTrack.
To be eligible for a tax deduction in 2020, contributions must be completed by December 31. However, it can take longer to contribute some types of assets than others, so be sure to plan ahead and begin the process early. As COVID-19 continues to have far-reaching effects across the globe, now is the time to consider how to have the greatest impact through your charitable giving. It is more critical than ever to think generously and strategically about charitable giving in 2020—to maximize your tax benefit and your support of the charities you care about most.
Want to take advantage of tax-smart giving methods this year to make the most of your donation?
1The CARES Act provisions do not apply to contributions to supporting organizations nor public charities that sponsor donor-advised funds, like Fidelity Charitable.
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Since 1991, we have been a leader in charitable planning and giving solutions, helping donors like you support their favorite charities in smart ways.
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