Translating inspiration into action
I’m extremely proud of my mom for finding a way to make a positive impact, and it got me thinking about what more I could be doing. As a financial advisor, I’ve seen firsthand how the pandemic is affecting clients and their families. I’m thankful to be in a position to help them by providing advice and guidance on how to navigate the financial challenges they’re facing. I’m also blessed to work with clients in fortunate circumstances who see the current situation as a call to action to help others. People are helping others in extraordinary ways, and many more want to help but don’t know where to begin. I realized one way I can help is by sharing information about how we can make things easier for those affected. So if you’re looking for ways to ease the burden on friends, family, and those in your community during the pandemic, here are some ideas.
The IRS allows you to gift up to $15,000 per individual per year without incurring a gift tax. Married couples can combine gifts for a total of $30,000 per person per year. These gifts can go to anyone—family members, friends, or even your favorite barista or local restaurant owner who’s seen a significant drop in business. If you know someone who’s fallen on hard times, you can give them money directly as a form of support. Of course, if you want to give more than the annual exclusion amount, you can. Just note that you’ll need to file a gift tax return, and the additional amount will count against your lifetime gift tax exemption ($11.4 million).
Medical or tuition expenses
In addition to the annual gift tax exclusion, there’s an unlimited gift tax exclusion for qualified medical and tuition expenses. There’s an important restriction on this tax-free gift, however: You have to make the payment directly to the medical or educational institution. You can’t reimburse the recipient for payments they’ve made on their own. If you know someone who’s sick or needs help with their health insurance premiums, paying their bills directly is a great way to offer assistance.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides additional incentives for charitable giving. A new “universal deduction” allows for a charitable deduction of up to $300 per individual ($600 for married couples) on your tax return, regardless of whether you itemize your deductions. If you do itemize, you can deduct cash contributions of up to 100% of your adjusted gross income for 2020 (it’s normally limited to 60%). Theoretically, this means you could offset all your income and have zero tax liability if you give a large enough amount.
Qualified charitable distributions (QCDs)
Thanks to the CARES Act, required minimum distributions (RMDs) have been temporarily waived for 2020. Under normal circumstances, you’d be required to start taking minimum distributions from your tax-deferred retirement accounts when you reach age 72 (age 70½ if you turned 70½ before 2020). Although RMDs aren’t required in 2020, you’re still allowed to make a tax-free donation (up to $100,000) to a qualified charity directly from your IRA if you’re over age 70½. If you’re looking for organizations that are helping those in need during the pandemic, Vanguard Charitable has a wealth of resources and vetted charities to help narrow your search. Although making a QCD is still an option, the tax incentives for charitable giving from taxable accounts will likely be a more attractive option for most people. Here are a few reasons why you still might want to take a QCD in 2020, but be sure to consult an advisor or tax professional about your unique situation:
- You anticipate that skipping your RMD in 2020 will increase your taxes in future years. Taking a higher RMD in the future could also increase:
- Your premiums for Medicare Parts B and D.
- The taxable portion of your Social Security benefit.
- Your qualified dividend income and long-term capital gains taxes.
- You expect your tax rate to increase in the near future or intend to move to a state with higher income taxes.
- You want to make a charitable donation but don’t have enough taxable assets to fund the donation.
Cash donations plus a conversion
Since RMDs can’t be converted to Roth IRAs, 2020 presents a unique opportunity for individuals over age 72 to reduce their taxable IRA balance with a Roth IRA conversion and a cash donation from a taxable account. The Roth conversion would be taxable, but the cash donation could offset some of the tax liability if you itemize your deductions. This could have better short- and long-term planning benefits than taking a QCD.
There’s more to it than money
If you’re not in a position to provide financial help, that’s OK. Like my mom, you can find other ways to make a difference with the resources, skills, and time you have. Think creatively. Those affected by the pandemic will appreciate anything you can do to help.
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We recommend you consult a tax or financial advisor about your individual situation.