Charitable-Giving Strategies for 2020

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Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. As the year winds down and the pandemic reigns on, many investors may be wondering how they can make sure that their charitable dollars go as far as possible while still enjoying tax breaks. Joining me today to discuss charitable-giving strategies in 2020 is Christine Benz. Christine is Morningstar's director of personal finance.

Hi, Christine, nice to see you.

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

Dziubinski: Now, Christine, there's certainly enough need to go around in the world right now, and there are plenty of charities that want to lend a hand. And you see the first step in a charitable-giving strategy is to isolate the charity or charities that you want to donate to and then try to figure out how far they stretch their donors' dollars.

Benz: That is a really good first step, Susan. And so, what I would start with is what's called a Form 990 that charities must file with the IRS annually. And you can often find these forms on the charity's website, and it's a good check on whether the charity is on the up-and-up if they have filed this Form 990. And then, you might also look to a third-party site like Charity Navigator or GuideStar to do a little bit of due diligence on how efficient the charity is at giving the money out to people and entities in need. Those types of sites can be really, really useful when you're comparing, one, say, animal charity relative to another, you want to look for the ones that have been most efficient over time, not necessarily the ones with the best marketing.

Dziubinski: Let's say, I've picked my charity or my charities, and I want to make a direct cash gift, is it as simple as just writing out a check? Is there any additional documentation that I should make sure that I have on hand?

Benz: You would want to save a receipt, and you'll typically receive a receipt from the charity. I think it's ideal, actually, if you use a credit card because you'll have that credit card statement. You want that documentation, and it's really important to remember that in the year 2020 because of the CARES Act, which was passed due to the pandemic, even people who aren't itemizing their deductions can take advantage of a one-time charitable tax break of $300. So, it's not huge, and it's not double for married couples, unfortunately, but it is a way for nonitemizers to get a little bit of a tax benefit from their charitable giving. If you're giving above that amount, you'd certainly want to save receipts and other documentation of any giving that you're doing. That $300 tax break would only apply to cash gifts, too. So, it wouldn't apply to gifts of property, and it wouldn't apply to gifts to a donor-advised fund.

Dziubinski: Now, speaking of the CARES Act, because of the CARES Act, heavy givers have an opportunity to give even more for 2020. Can you talk about that?

Benz: Yeah, this is kind of a rarified group of people, but people who are in a position to give a very large percentage of their income can go even higher in 2020. So, in 2020 you're able to give up to 100% of your adjusted gross income. That's up from the previous threshold of 60% of adjusted gross income. So, that's something to take advantage of if you are a very heavy giver and you're able to be very generous this giving season.

Dziubinski: Now, one giving strategy that's been somewhat popular with Morningstar readers and users has been the qualified charitable deduction. Is this something that they can still use this year?

Benz: It is. This is the QCD, the qualified charitable distribution. It is still in effect for 2020, even though you don't have to take required minimum distributions. And so, for a lot of retirees those two things go hand in hand. They had to take their RMDs. They might send a bit of that or a lot of that to charity in the form of the QCD. The QCD is still an available option. It's also available for people who are aged 70.5 or older in 2020. So, keep that in mind. You can take advantage of this maneuver. Whether you should take advantage of it, I think, is maybe a place to get some tax advice, especially if you're giving a lot. But there still are a couple of advantages, even though you don't have to take RMDs this year. One is that it allows you to get pretax dollars over to charity, and the other big benefit is that it enables you to shrink your IRA balance, the amount which will be eventually subject to required minimum distributions. So, a couple of reasons to consider the QCD in 2020 even though you're not required to take those minimum distributions.

Dziubinski: And what about investors who have taxable accounts that they might want to tie to some sort of charitable donation? How might they do that?

Benz: This can definitely be a worthy strategy, and I would say it's especially effective for people who have overweight positions in stocks or funds that they might like to lighten up on. So, the idea is that you can send the security itself over to the charity or use a donor-advised fund to accept the appreciated asset. So, it effectively washes the tax burden out of your account and transfers that security over to the charity. Kind of a countervailing force though in 2020, Susan, is that a lot of people find themselves in a temporarily low income tax bracket, either because they've had reductions in their working income or because we have that pause on required minimum distributions this year. So, you'd want to balance the two sets of things for people who are giving a lot to charity in this way. They may want to wait for a year when they need those deductions more versus this year when they may in fact be in a lower tax bracket due to reduced income.

Dziubinski: Christine, thank you so much for these wonderful charitable-giving ideas today. Happy Holidays to you.

Benz: Thank you, Susan. Happy Holidays to you, too.

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