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Charitable Giving Strategies in 2021

Donor-advised funds, gifting appreciated stock, and qualified charitable distributions are just some of the options.

Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. Despite the pandemic and the fact that many households are in financial distress, charitable giving was up in 2020. Joining me today to discuss some charitable-giving strategies is Christine Benz. Christine is Morningstar's director of personal finance.

Hi, Christine. Thank you for being here today.

Christine Benz: Hi, Susan. It's great to be here.

Dziubinski: That's really some wonderful news that charitable giving was up in 2020. Why do you think that was?

Benz: Well, it's hard to say. But you're right, Susan, a Journal of Philanthropy report said that charitable giving was up about 11% in 2020 versus 2019. Some of the food-related charities saw very heavy donations. I think people quite reasonably viewed the pandemic as kind of a disaster and provided charitable giving accordingly. We also saw some of the very large donors step up their giving during the period. But I would point out, Susan, that the charitable giving hasn't necessarily been across the board. So, some of the food-related charities have seen very nice donations, but some of the arts- and culture-related charities have seen a downturn, in part because many of us have not been able to take part in cultural events or visit art museums, and that's oftentimes when we do that charitable giving, if we re-up our subscriptions, re-up our memberships at the time we do those visits. So, it has not been universal. Some charities are still really struggling.

Dziubinski: One idea that's been floating around is: If you're receiving a stimulus check and you really don't need that money to cover expenses, people are talking about perhaps donating those dollars. What do you make of that?

Benz: I think it's certainly an admirable strategy for people who can afford to do it. I hesitate to tell anyone what to do with their funds--and specifically with respect to charitable giving. I would say, if you receive a stimulus and you have anything in your financial life that you can use it to improve--for example, do you have debt you can pay down?--focus on that first. But if you can earmark at least a portion of your stimulus check for charitable giving, I think that that can be a terrific strategy. And charities really do welcome donations large and small. So, you wouldn't need to turn over your entire stimulus check. If you can carve out a small piece of it, I think that's terrific.

Dziubinski: And then, there are always questions when it comes to charitable giving--about charitable giving and tax deductions. Walk us through some of the rules there.

Benz: Right. The big one is whether you and your household are taking the standard deduction or you are itemizing your deduction. If you're an itemizer, then you can write off your charitable contributions. If you're taking the standard deduction, which means that your itemized deductions don't exceed $12,550, or double that if you're part of a married couple filing jointly, so your itemized deductions don't exceed those thresholds, then you cannot take a charitable deduction, with one exception. In 2021 as well as in 2020, people could take a small deduction, a small nonitemized deduction, for charitable contributions. And that has been increased a little bit for 2021. For 2021, a contribution of $300 for single filers and $600 for married couples filing jointly is an above-the-line deduction. So, take a look at that. Even if you're making small contributions, you can deduct a portion of that, and it's an above-the-line deduction. So, you don't need to be an itemizer. It's also important to note, though, Susan, that you cannot contribute property to charity. These must be cash contributions. And you can't make the contributions to a donor-advised fund. So, the contributions must go straight to charity.

Dziubinski:
Speaking of donor-advised funds, let's talk a little bit about them. How do they work, and who might they be a good vehicle for?

Benz: These are accounts that are accounts that you earmark for charitable contributions. You send the money to the donor-advised fund. The contribution you make to it is deductible in the year in which you make the contribution. And the beauty of the donor-advised fund is that the money doesn't need to be dispersed in that year. You can invest the money; you can take your time to get it distributed to the charities of your choice. And another really neat feature about donor-advised funds is that they can accept contributions of stock. So, if you have highly appreciated stock in your portfolio, often employer stock is a good fit here, you can send it to the donor-advised fund, and you are able to deduct that contribution, you're able to improve your portfolio, and then eventually, when you get the money over to a charity, you are able to help the charity. So, it's kind of a three-fer, especially for people who have highly appreciated positions in their portfolios.

Dziubinski: And what about charitable contributions in retirees? There are some incentives for retirees when it comes to charitable donations, right?

Benz: There are. For people who are over age 70.5, they can use what's called a qualified charitable distribution, or QCD. And the basic idea here is that you are sending the money from your IRA directly to the charity or charities of your choice. And the virtue of the QCD from a tax standpoint is that it reduces the amount of your IRA balance that is subject to taxes. And it also reduces the amount of your IRA balance that is subject to required minimum distributions. If you're over age 72 and you are subject to those RMDs, you can use the QCD to fulfill at least a percentage of your RMD obligation. It's a really neat strategy. I always say that retirees who are subject to RMDs and are charitably inclined should definitely run those charitable contributions through the QCD. It will tend to beat taking money out of the IRA and then writing a check to charity. It will tend to be a more tax-effective strategy.

Dziubinski: Christine, thank you so much for these charitable ideas today. We appreciate it.

Benz: Thank you, Susan.

Dziubinski: I'm Susan Dziubinski with Morningstar. Thank you for tuning in.

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