Charitable Gifts to Make by December 31 – Before the Tax Benefits Disappear 

An estimated 30 percent of all charitable giving occurs just in the month of December. This annual tide of generosity is critically important to organizations that serve our communities. There is also a practical benefit to the donor: if your gift is not made by December 31, then the tax deduction is lost until next year.

This year, the clock really is ticking on three major charitable benefits that will expire on December 31. Now is the time to connect with your advisors and with the Trust about making a gift that enables you to do good while capturing the following tax benefits.

1. Qualifying for a $300 or $600 deduction for gifts of cash to charity for non-itemizers

Certain provisions of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) were extended last December. The provision most beneficial to those who do not itemize is the ability to reduce their taxable income for gifts of cash made to public charities. The limitation is $300 for those who file as single and $600 for those who file as married, jointly. This is a greater benefit than last year because those who were married and filed jointly could only claim $300. Remember, however, that gifts to donor advised funds and supporting organizations are not eligible. Therefore, if you would like to support the work the Trust is doing in the region and receive a tax benefit, consider making a gift to We Rise Together: For an Equitable and Just Recovery, the Chicago Fund for Safe and Peaceful Communities, or Unity Fund.

2. Eliminating 100% of taxable income by giving gifts of cash to charity

Another provision of The CARES Act that was extended in 2021 is the ability for taxpayers who itemize to deduct up to 100% of their adjusted gross income. The gift must be made in cash. Gifts of other asset types, such as stock or real estate, will reduce the percentage available to take for the cash gifts. The 100% deduction is done as an election for each gift, otherwise, the deduction is limited to 60% of adjusted gross income. Again, gifts to donor advised funds and supporting organizations are not eligible. However, as stated above, the Trust has other fund types and opportunities to ensure your gift makes a significant impact on our Chicago communities and qualifies for the deduction

Here are a couple of out-of-the-box ways to take advantage of this provision:

• Give cash to offset a Roth conversion– Converting a traditional IRA to a Roth results in a taxable event, meaning that the amount you chose to convert is added to your adjusted gross income as ordinary income. The conversion could also push you into a higher income tax bracket. A charitable gift of cash can eliminate the additional income. Although income tax rates are currently very low, they may increase next year and there have been discussions about limiting Roth conversions. Even if Congress does nothing, income tax rates are scheduled to increase in four years back to pre-2017 rates.
• Give cash to establish a charitable gift annuity– Charitable gift annuities are a terrific way for donors to support their favorite charity and receive money for themselves or other family members. Also, they are simpler than a trust. Current gift annuities provide money now while deferred gift annuities are often used for retirement planning. Gift annuities are a bargain sale, meaning part gift and part sale, and the donor is eligible for (i) a charitable income tax deduction and (ii) tax-free money. When funded with cash, often more than 85 percent of the money received is tax free. However, as interest rates rise – our current situation – the percentage of tax-free money is reduced. This is because the IRS requires us to use an interest rate which changes monthly. More on that point below.

A non-grantor charitable lead trust could also be drafted and funded in a way that eliminates up to 100% of taxable income this year or after 2021. However, the provisions of The CARES Act apply to a wider range of vehicles and donor situations.

3. Using the 1% deemed rate of return for gift annuities, lead trusts, and retained life estates

Donors who are considering a gift annuity, lead trust, or retained life estate should make that gift by December 31, 2021, or they could lose out on significant tax benefits. The tax benefits for all those gifts depend upon a monthly interest rate set by the IRS. In general, the lower the rate, the better the benefit.

Although the rate has been at historic lows, it is currently rising. This year, the rate has more than doubled since January (0.6% in January to 1.4% in December). The IRS permits donors making these gifts in December to use the 1% October rate.

The ability to use the 1% rate rather than a higher interest rate means:

• For gift annuities– a greater percentage of money received will be treated as tax-free income.
• For charitable lead annuity trusts
  • Non-grantor lead annuity trust – a greater likelihood of a tax-free transfer to heirs and a larger amount available to family. How much? Compared to a 2% interest rate, $550,000 more on a 15-year, zeroed-out, 5% lead annuity trust funded with $5 million.
  • Grantor lead annuity trust – a higher charitable deduction. For example, compared to a 2% interest rate, more than $24,000 on a 10-year, 5% lead annuity trust funded with $1 million.

The Trust has previously covered lead trusts here and here.

• For retained life estates– a larger income tax charitable deduction. As background, these are gifts where a donor is eligible for an immediate income tax deduction when she makes a gift of real estate and retains the right to use it for life. These gifts are limited to homes, vacation properties, other personal residences or farmland. When the interest rate is low, like now, the deduction can be very large – often around 70% or higher – of the property’s value.

To summarize, gift annuities, lead trusts, and retained life estates, if completed before December 31, 2021, will cost donors less than in 2022 when interest rates have increased.

No one knows the future, but once these opportunities are gone, they’re gone. To ensure that these opportunities meet your tax goals, talk to your professional advisor.

To ensure they meet your charitable goals, contact the Gift Planning team at The Chicago Community Trust, donorservices@cct.org.

IMPORTANT LEGAL DISCLOSURE 

The information provided is general and educational in nature. It is not intended to be, and should not be construed as, legal or tax advice. The Chicago Community Trust does not provide legal or tax advice. You should consult your tax advisor to properly determine the tax consequences of making a charitable gift to The Chicago Community Trust.