Historically, cash contributions to charity were a terrific way to reduce your taxes. Recently, however, increases in standard deduction amounts and limitations on how much can be deducted relative to one’s Adjusted Gross Income (AGI) have made contributing cash less appealing than contributing appreciated assets, like stock or real estate.
This appeal exists because such a donation allows a donor to eliminate paying any tax on the growth of the contributed asset. By negating capital gain exposure (oftentimes significant amounts), the combination of tax deduction and tax avoidance has, in recent years, made these kinds of gifts more attractive to many donors.
That was until the recent passing of the CARES Act in late March. Normally, contributing cash subjects a donor to a 60% AGI limitation for deductions. Although that figure is twice as much, per year, as the donation of an appreciated asset (30% AGI limitation), the addition of the tax avoidance for the appreciated asset gift made the total tax benefit to the donor as good, if not better, than donating a cash equivalent. For 2020, however, donors are able to deduct 100% of income. This provision, in an effort to keep donors giving to struggling charities, has the potential to change the giving dynamic for individuals with appreciated assets and a heart to give.
What’s more, any deduction amounts not used in the year of contribution due to the limits may be carried forward for five years. What type of donation would maximize your tax savings in 2020? Answer: it depends. It depends on your income, the amount of your contribution, and the cost basis of your appreciated asset. The chart below will help you decide what type of donation will maximize your tax savings in 2020.
*Assumptions: Married Filing Jointly $10,000 of Other Itemized Deductions
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