It has been an incredibly challenging year for millions of people, businesses, and nonprofit organizations.

If you’re able to help, there are several ways to donate to nonprofits and receive a tax benefit.

Special 2020 $300 Deduction

As in years past, you can still itemize your deductions and receive a tax benefit for your contributions, but there is a new provision this year that may apply to your situation even if you don’t itemize. As part of the CARES Act, each tax return can claim an “above the line” deduction of up to $300 for cash contributions made to qualified charitable organizations.

Above the line deductions do not require you to itemize, making it easier for more taxpayers to benefit from their donations. It is important to note that this $300 limit is per tax return, regardless of filing status. It remains unclear whether this deduction is a one-time opportunity or will remain an option in future years.

Special 100% of AGI Deduction Threshold

Another special provision in the CARES Act allows you to deduct donations up to 100% of your adjusted gross income (AGI) in comparison to the previous limit of 60% of AGI. Certain taxpayers may find it beneficial to utilize this one-time provision to deduct a larger donation than is normally allowed.

Qualified Charitable Distributions

Taxpayers over the age of 70 ½ can distribute up to $100,000 annually from their qualified retirement accounts directly to charity. A QCD has the benefit of offsetting Required Minimum Distributions from retirement accounts. QCDs that are less than or equal to the amount of the RMD have the same net impact on taxable income as donating cash and taking the itemized deduction. One advantage of a QCD is that you do not need to itemize to receive the tax benefit. Another advantage for higher income taxpayers is that a QCD reduces AGI, which can reduce the Net Investment Income Tax and Medicare IRMMA surcharge.

While QCDs have gained popularity over the last few years, they will likely decrease in 2020 as the CARES Act waived Required Minimum Distributions from retirement accounts in 2020.

Donate Appreciated Securities vs. Cash

Taxpayers who donate appreciated securities like stocks or mutual funds generally can deduct an amount equal to the market value of the donation. The added benefit to taxpayers is that any unrealized appreciation is wiped away because of the donation. Gifting appreciated securities can help investors lower their income tax and capital gains tax liabilities.

Bunching Donations

In recent years, fewer taxpayers have itemized because of the 2017 Tax Cuts and Jobs Act, which increased the amount of the standard deduction and eliminated or limited several itemized deductions. To capture the benefits of charitable donations, certain taxpayers can benefit from bunching multiple years of contributions into a single year, so their itemized deductions exceed their standard deduction. This same strategy can be used on other deductible items, like qualifying medical expenses.

Donor Advised Funds

Donor advised funds can be a great tool for investors who are interested in bunching and/or donating appreciated securities because it functions like a simplified private foundation. Contributions made into the DAF are deductible upfront, but the assets can be dispersed to qualified charities over time at the DAF owner’s discretion. Donor advised funds can be a particularly impactful tool when a taxpayer wants to receive the benefit of a large donation upfront and would like to retain control of the ultimate distribution of those funds over an extended period.

Author Justin D. Smith Financial Advisor

Justin has been involved in the financial services industry since 2005. He earned a bachelor’s degree from the University of Michigan and is a frequent speaker on tax-smart retirement planning.

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