With the cooler weather upon us, many are looking again at year-end tax planning strategies. We reached out to Jeffrey Belair, a partner with Smith, Watson & Company, LLP in Pittsfield, to benefit from his nearly 20 years of public accounting experience. He assists high-net-worth individuals, including business executives and owners and their families, with the management of numerous aspects of wealth accumulation and transfer. He offers clients extensive experience related to complex individual tax compliance and planning, financial planning, and trust and estate design.
Tax Legislation
Over the last several years, there have been a variety of changes to the tax law in response to the pandemic. However, this year has seen very little change and has brought with it a bit of relief to taxpayers who have been navigating their planning in a sea of constant change.
A quick reminder regarding two provisions that were enacted during the pandemic that are no longer available this year:
- The temporary suspension of limits on qualified charitable contributions expired at the end of 2021. In 2020 and 2021, taxpayers were allowed to deduct qualified charitable contributions (essentially, contributions of cash) up to 100% of their adjusted gross income. Beginning in 2022, the percentage limitation reverts to 60% of adjusted gross income (as it was prior to the temporary suspension).
- The “above-the-line” deduction for cash charitable contributions also expired at the end of 2021. This previously provided for a $300 ($600 for joint filers) deduction for cash charitable contributions made for those who did not itemize. However, even if you don’t itemize at the federal level, be mindful that many states offer tax incentives (by way of a deduction or state tax credits) for charitable giving – check in with your tax advisor to learn more.
Charitable Giving From Your IRA
However, one change from the last several years, related to charitable giving from your IRA, is here to stay. Those aged 70 ½ years or older by year-end have the option to consider making charitable contributions directly from individual retirement accounts (IRAs) via qualified charitable distributions (QCDs).
QCDs are made directly to charities from IRAs (up to an annual limit of $100,000). By making a QCD, the amount of the distribution from the IRA is eliminated from income and benefit is received for the contribution (even if a taxpayer doesn’t itemize their deductions). As a reminder, required minimum distributions (RMDs) must begin in the year the taxpayer turns age 72. Any QCD made counts towards satisfying a taxpayer’s RMD. While RMDs are not required before age 72, those aged 70 ½ years still have the option to make QCDs.
Donor Advised Funds
In addition to giving from IRAs, consider optimizing your charitable giving by using a Donor Advised Fund (DAF) like those offered through Berkshire Taconic Community Foundation. When contributions are made to a DAF, an immediate income tax deduction is allowed, no different than most contributions made directly to charity. One significant benefit of using a DAF is that the donor is able to recommend a future grant to an ultimate charity when the timing may be more appropriate. In addition to the financial benefits of a DAF, housing your DAF at a community foundation allows you access to the foundation’s local knowledge and expertise in grantmaking, plus the ability to pool resources with other donors to increase the impact of your giving.
Contributions to DAFs can be made with cash, marketable securities, or potentially other assets such as real estate or privately held business interests. For the most optimal tax outcome, consider donating assets (held long-term) with high appreciation. By donating highly appreciated assets, a donor can receive a deduction for the fair market value and, at the same time, eliminate the tax burden on the unrealized gain. DAFs are not eligible for distributions from IRAs.
In addition to funding a DAF, consideration should be given to the non-financial benefits that can be achieved by involving children or grandchildren, for example, in future grant recommendations. Once a DAF is funded, the ability to make grants in the future presents an opportunity (and ample time) to educate the next generation on responsible giving and how to ensure your and their generosity is put to best use.
Perhaps this year’s theme could be thought of as “getting back to basics.” Remember, proactively collaborating with your team of advisors will ensure optimal success. When considering your year-end charitable giving, be sure to involve not only your tax advisor, but a philanthropic partner such as Berkshire Taconic Community Foundation, to have the highest likelihood of success all around.
Please notify Berkshire Taconic of your intention to transfer stock or cash in advance by calling 413.229.0370 or emailing finance@berkshiretaconic.org. You can download our Cash Wiring and Stock Transfer forms on our website.
Berkshire Taconic is here to help you, effectively and with the greatest impact, channel your generosity to the causes and organizations you care about most. We welcome your questions about year-end giving and building your legacy through planned gifts. Please send an email to Kara Mikulich or Jill Cancellieri, or any member of our Philanthropic Services team at PS@BerkshireTaconic.org. We also encourage you to seek advice from your financial advisor.
Every year, we work with hundreds of donors to reach their philanthropic goals.
