3 Great Charitable-Giving Strategies for Retirees in 2021
Tax-friendly ideas for small, medium, and supersize givers.
A version of this article previously appeared in August 2021.
As I was recently helping a relative get organized before a move into a new, senior-friendly home, I was struck by how much charitable giving clearly meant to her. Even though she doesn't have a lot of investment assets or income, the paper trail of receipts and other charity-related mailings were a clear sign of the pride she takes in giving to causes she believes in. Healthcare and animal-welfare organizations appeared to be particular favorites, and she told me that she also loves making tribute donations to honor friends and family members who have passed away.
The experience was yet another reminder that charitable giving isn't just for heavy hitters whose names are etched on plaques on the walls of museums and hospitals. It's also for generous-hearted people of more modest means who want to do their part to make the world a bit better. And I say keep it up. Numerous studies have corroborated the connection between giving and happiness. In a paper entitled "Prosocial Spending and Happiness," for example, researchers found that spending money on others helps elevate people's sense of happiness and well-being.
Charitable giving can also make good financial sense for retirees, both wealthy ones and those of more modest means like my family member. Not only can they take advantage of strategies like qualified charitable distributions from IRAs, but they might also be more likely than younger adults to itemize their deductions because of higher healthcare costs. That means that they'll receive credit for their donations. Finally, equity assets have performed well, giving retirees the opportunity to gift appreciated assets without exceeding their own withdrawal guidelines.
As retirees think about their charitable-giving strategies for 2021 and beyond, here are some key considerations.
The percentage of taxpayers who itemize their deductions on their tax returns plummeted to about 10% following the passage of the Tax Cuts and Jobs Act in 2017. The net effect is that most such taxpayers couldn't realize a tax benefit from charitable giving because they didn't have critical mass to itemize. (The less wealthy you are, the more likely you are to take the standard deduction rather than itemizing.) But small givers like my relative can now receive credit for at least a portion of their donations, even if they don't itemize their deductions on their tax returns. That's because the charitable deduction that the pandemic-related Cares Act made available in 2020 has been extended and even expanded a bit for 2021. For this year, all taxpayers who don't itemize can deduct up to $300 on their tax returns, and married couples filing jointly can double the deduction to $600. (In 2020, the limit was $300 regardless of filing status.) It's also important to point out that these must be cash donations; donations of property or investment securities don't qualify, nor do donations to donor-advised funds. But this deduction is a good way for smaller givers who don't itemize to reap at least a small tax benefit from their charitable gifts.
A qualified charitable distribution, or QCD, from an IRA provides another mechanism for retirees to give to charity regardless of whether they itemize or claim the standard deduction. Under a QCD, which is available once you turn age 70.5, you simply instruct the charity to steer a portion of your IRA, up to $100,000, to the charity(ies) of your choice. That donated amount avoids income tax altogether. For retirees with highly appreciated assets in their accounts, the QCD provides a nice four-fer: It allows them to be charitable, it fulfills all or a portion of their required minimum distribution obligations if they're age 72, it reduces their RMD-subject balances, and, to the extent that they sell appreciated assets to fund the QCD, it can help reduce risk in their portfolios. (Pruning appreciated equity assets to fund QCDs and/or RMDs would seem to be a particularly savvy strategy today.) Note that there's a bit of a disconnect with the QCD-eligible age (70.5) and when RMDs kick in (72). For retirees who are in the enviable position of having more in their IRAs than they think they'll ever need in their own lifetimes, starting QCDs at age 70.5 helps reduce the balance that will eventually be subject to RMDs.
It's also worth noting that traditional IRA assets are ideal assets to earmark for charity through beneficiary designations. Even though naming a charity as an IRA beneficiary doesn't confer any sort of immediate tax benefit, in contrast with the QCD, the assets fully escape taxation upon your death. Roth IRA assets, meanwhile, are less desirable as IRA beneficiaries, because qualified withdrawals wouldn't be taxable to you during your lifetime or to your heirs after your death. (They may be subject to estate tax, though.) In other words, you or your loved ones can better enjoy the tax benefits than the charity could. Also remember that it doesn't need to be either/or with beneficiary designations; you can name multiple beneficiaries in varying percentages--for example, 90% to your adult daughter and 10% to a charity.
For retirees who have substantial non-IRA assets--taxable assets that would otherwise be subject to capital gains tax upon sale--gifting such assets to charity during your lifetime can confer multiple benefits, tax and otherwise. First and foremost, the charity receives the full benefit of the amount gifted--it won't owe tax--and you can deduct the charitable contribution on your tax return. (In 2021, individuals can deduct charitable contributions of up to 100% of their adjusted gross incomes, but certain limitations apply; get some tax help if you're making a very large gift.) And if the assets have appreciated sharply since purchase, the charitable gift effectively washes out your own tax liability while also reducing risk in your portfolio.
You can give the assets directly to charity or use a donor-advised fund; donor-advised funds can often accept less liquid securities that charities aren't well equipped to handle. Just be sure to mind the fees of donor-advised funds: My colleague Amy Arnott took a worthwhile spin through the major donor-advised funds in a series that included Vanguard Charitable, Schwab Charitable, and Fidelity Charitable Gift.
Note that I have this in the "for large givers" section, but this isn't just a worthwhile strategy for Range Rover types. People with smaller portfolios might also have highly appreciated taxable positions, especially in employer stock. In such instances, charitable gifts make an ideal way to give to charity, receive a tax break, and reduce risk in your portfolio. Retirees who wouldn't normally be itemizers may be able to "bunch" other deductions onto their tax return for the year in which they make the large charitable gift--for example, expensive elective dental procedures. That strategy can help them get the most bang for their deductions in the itemization year.