Four ways to help clients maximize charitable giving impact in 2021

Get ahead of potential tax reform and charitable giving

Key Points

  • Charitable planning is an important way for you to enhance your offer and deepen client relationships.

  • Help your clients take advantage of charitable strategies to minimize taxes and maximize their philanthropic impact.

  • The environment remains favorable for charitable giving, given historic market performance, existing tax laws, potential tax reform, and the extension of the CARES Act provisions.


Financial advisors increasingly offer charitable planning as a way to enhance their value to clients by helping them incorporate philanthropy into their overall financial planning. According to the 2021 RIA Benchmarking Study from Charles Schwab, 85% of advisors offer charitable planning services to help deepen their value proposition.1 It's an important value-added service for advisors to offer, because 90% of high-net-worth households in the U.S. give approximately $30k to charity each year on average.2

As the end of the year approaches, here are four key ways advisors can help clients increase their giving power at a time when we are witnessing historic levels of philanthropy in the U.S.

Strategies for maximizing impact in 2021 

1. Give appreciated non-cash assets instead of cash

One of the most powerful tax-smart strategies is donating appreciated non-cash assets held more than one year. You might be familiar with this concept, but many clients don't realize that it's more tax-efficient to give appreciated assets instead of cash. So this may be a good conversation to have whenever you are re-balancing your clients' portfolios or discussing strategies for concentrated positions. You can add value and reinforce your role as a trusted-advisor by showing your clients a tax-smart way to give.

Clients who use this strategy can generally eliminate the capital gains tax they would otherwise incur if they sold the assets first and then donated the proceeds, potentially increasing the amount available for charity by up to 20%. This strategy can also significantly increase your clients' tax savings, as shown in the example below. 

In fiscal year 2021, approximately 60% of contributions to Schwab Charitable were in the form of non-cash assets, including publicly traded securities, restricted stock, and private business interests. 

Cost basis of 5,000 on taxes
This hypothetical example is only for illustrative purposes. The example does not take into account any state or local taxes or the Medicare net investment income surtax. The tax savings shown is the tax deduction, multiplied by the donor's income tax rate (24% in this example), minus the long-term capital gains taxes paid.

2. Leverage a charitable deduction strategy

Some clients may find that the total of their itemized deductions for 2021 will be slightly below the level of the standard deduction. It could be beneficial for them to bunch or combine 2021 and 2022 charitable contributions into one year (2021), itemize deductions on their 2021 tax returns, and take the standard deduction on 2022 taxes. In addition to achieving a large charitable impact in 2021, this strategy could produce a larger two-year deduction than two separate years of itemized deductions, depending on income level, tax filing status, and giving amounts each year. 

Bunching case study
This hypothetical example is only for illustrative purposes.

Charitable clients who bunched two or more years of contributions into 2020 and subsequently will take the standard deduction for 2021 may also consider taking the special $300 or $600 CARES Act deduction for cash donations made to operating charities in 2021, as described below.

There are other situations where bunching contributions might be appropriate as well. For example, if you have clients who are nearing retirement, they could consider bunching or frontloading their giving in certain years and then taking the standard deduction in other years. This will allow your clients to take a bigger deduction while they're possibly in a higher tax bracket, and set the money aside to fund charitable giving during their retirement.

Alternatively, donors who itemize deductions and wish to achieve a large charitable impact in 2021 may choose to give beyond annual deduction limits and carry over the excess amounts up to five tax years.

Keep in mind that donors seeking a 2021 tax deduction must have their gift received and processed by December 31, 2021, and some non-cash assets require additional processing time.

3. Give more by donating retirement assets

Clients who are in or near retirement or reviewing estate plans might consider using three tax-smart tips to help maximize their charitable impact this year as part of their overall legacy planning. Here are some strategies that you can share with your older clients. 

The first tip is to make a Qualified Charitable Distribution (QCD) of Individual Retirement Account (IRA) assets. Whether itemizing deductions or claiming the standard deduction, individuals age 70½ and older can direct up to $100,000 per year tax-free from their IRAs to charities through QCDs.3 By reducing the IRA balance, a QCD may also reduce the donor's taxable income in future years, lower the donor's taxable estate, and limit IRA beneficiaries' tax liability. QCD requests generally should be initiated by early December at the latest to ensure processing is complete before the end of the year.  

The second tip is to use a charitable deduction to help offset the tax liability of a retirement account withdrawal. This strategy may be used by individuals over age 59½ (to avoid an early withdrawal penalty) who will itemize deductions for 2021. As with the above strategy, a withdrawal offers the additional benefits of potentially reducing a donor's taxable estate and limiting tax liability for account beneficiaries.

The third tip involves converting retirement accounts to Roth IRAs. Individuals who itemize deductions and have tax-deferred retirement accounts, such as traditional IRAs, can use charitable deductions to help offset the tax liability on the amount converted to a Roth IRA. The primary benefits of a Roth IRA are tax-free growth, potentially tax-free withdrawals (if holding period and age requirements are met), no annual required minimum distribution, and the elimination of tax liability for beneficiaries (depending on the timing). Be sure to talk with a tax professional or financial advisor before deciding to do a Roth IRA conversion.

4. Encourage clients to recommend recurring grants for unrestricted use

You can also add value to your clients and help them make a bigger impact by being more strategic and efficient with their gifts to charity. Predictable and steady streams of revenue help charities solidify their finances and effectively plan and deliver their services, especially during difficult times. Donors can provide ongoing revenue through a series of recurring grants awarded indefinitely or over a defined period of time. 

In addition, donors who recommend grants without specifying or designating a purpose or program afford charities greater flexibility in fulfilling their mission. The pandemic highlighted the importance of such flexibility and Schwab Charitable donors responded during fiscal year 2021 with a 48% increase in the number of unrestricted grants compared to the previous fiscal year.

Favorable giving environment

Tax reform and charitable giving webcast

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The S&P 500® index roughly doubled between 2016 and 2021, and many of your clients may have highly appreciated non-cash assets in their portfolios, including private business interests and real estate investments. Existing tax laws offer incentives to donors who contribute appreciated non-cash assets held more than one year. 

Annual income tax deduction limits for gifts to public charities, including donor-advised funds, are 30% of adjusted gross income (AGI) for contributions of non-cash assets held more than one year and 60% of AGI for contributions of cash. Donation amounts in excess of these deduction limits may be carried over up to five tax years.

There are also significant tax incentives for charitable giving through provisions in the CARES Act that have been extended through the end of 2021. If you have clients that take the standard deduction, individuals can claim an additional deduction of up to $300 for cash contributions directly to operating charities, and married couples filing jointly can claim up to $600.

Donors who itemize deductions may elect a CARES Act 100% of AGI deduction limit for cash contributed directly to operating charities, and deduction amounts above this limit may be carried over for up to five tax years. In addition, the annual deduction limit for cash contributions by a business stays at 25% of taxable income instead of reverting back to the 10% cap.

Note that CARES Act incentives are not applicable for contributions to donor-advised funds, supporting organizations, or private foundations.
 

What you can do next

Schwab Charitable offers a variety of resources to help you guide charitable giving conversations with clients.

  • Visit the new 2021 giving season toolkit for materials to deepen client engagement, educational whitepapers to share with your clients, and helpful information regarding donor-advised fund accounts.
  • Get the Schwab Charitable Giving Guide and walk your clients through the process to generate a comprehensive giving plan that maximizes their giving power.
  • Call Schwab Charitable at 800-746-6216 to schedule a meeting with your charitable Relationship Manager.

If your clients are considering any of the charitable tax strategies highlighted above, you may want to consult with their tax and legal advisors before taking action or encourage them to do so. 
 

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