Americans are truly the most generous people on the planet. During COVID-19, we slid to 19th place in world rankings but quickly recovered to a tie for first place with Myanmar (we learned it as Burma). Even American millennials have begun to establish patterns of generosity. For the record, we applaud their efforts.
For many Americans, generosity is not rooted in tax benefits but is instead just part of their DNA. Studies have shown that the number one reason for charitable gifting is to support causes and concepts near and dear to them. Nonetheless, saving on taxes, or otherwise improving current or future cash flow, is a plus.
Uncle Sam encourages gifting, using the tax system to exclude donations to qualified charities from taxable income. This deduction is currently applicable only to taxpayers who itemize deductions, which has become a far smaller percentage of the population in recent years. The loss of itemized deductions has surprisingly not put a damper on our collective generosity.
Taxpayers aged 70-1/2 and above may avoid taxation on their charitable gifts using Qualified Charitable Distributions (QCDs) from IRAs. We discussed QCDs in recent blogs. Maximizing the cash flow impact of donations for people under 70-1/2 will be a subject for upcoming Blogs.
Wealthier Americans use gifting to spread their assets around while they are alive, possibly shielding those funds from a high Estate Tax rate upon their death. While the value of assets excludable from taxation at death is currently quite high, there is a strong likelihood that those limits will drop in the future. Depending on the possible reduction in exclusion limits, many more Americans may find themselves over the tax-free limit. Escalating housing values, retirement assets, and higher incomes, all add up over time, and planning is critical to minimize the impact of future Estate Taxes.
This time of year, many charities solicit donations using a matching gift process, whereby a wealthy Samaritan matches (sometimes even multiplies) donations from average Americans. While this does not improve the donors’ cash flows, it adds to the satisfaction received from their generosity.
Based on taxation rules, it is apparent that our Federal Government strongly encourages individual generosity. Based on the track record of Americans, it seems that we are only too pleased to respond positively.
In the coming Blogs, we will cover many more topics of interest to charitably-minded citizens.
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