The New 100% AGI Charitable Deduction – Is It Right for You?

PhilanthropyTax

May 7

Written By Mike Mulcahy, CFA® CPWA® CTFA

100% AGI Deduction Opportunity Extended to 2021

One of the most generous and exciting parts of this year’s tax laws – yes, something related to tax law can be exciting – is the opportunity to deduct up to 100% of your Adjusted Gross Income (AGI) in 2021. This provision was placed into effect in 2020 under the CARES Act and was extended into 2021 with the Consolidated Appropriations Act.

While a 100% deduction is appealing for those who are charitably inclined, it may not be the most tax-efficient strategy to implement alongside your charitable giving. Let me explain.

The Tax-Efficiency of 100% AGI Deduction

The current highest marginal income tax bracket is 37.0% plus an additional 3.8% for net investment income. And as income levels decrease so do tax bracket rates, with the lowest tax bracket reaching 10%. As a result, the more you increase your giving and reduce your income, the less utility (from a tax savings perspective) you may get from those gifted dollars. Typically, you still get some tax savings, but the value of those savings drops. Moreover, if you take your income down to $0, you lose the value of potential tax credits and a 0% long-term capital gains rate below certain AGI thresholds.

Before jumping on the 100% AGI charitable deduction bandwagon, you should evaluate different options and think about your giving within the context of your lifetime giving goals. 2021 may provide an exciting opportunity, but context is key when considering the efficiency of tax strategies.

Another Option for Making Use of This Opportunity

Rather than giving 100% of your AGI, it may be more tax-efficient to give some this year and some in future years, seeking to capture the deduction against higher tax brackets. The tax law has historically capped giving at 50% to 60% of AGI but has provided for rolling over excess giving to future years. While this is still true, with the 100% approach you consume the deductions at lower tax brackets in the current year! In summary:

Option 1: Give 100% of AGI in 2021 and deduct 100% so you pay no taxes in 2021. The value of your tax savings is reduced with every tax bracket you lower yourself into.

Option 2: Give a portion of your AGI in 2021 and give the remainder in other years to reduce your highest marginal tax rate for more years than just 2021 to maximize your tax savings.

Scenarios in Which You May Want to Deduct 100% AGI

When may you want to deduct 100% of your AGI?

You have a specific charitable goal and must give in this year. However, there are strategies to address this.
You plan to always be giving at the highest deductible level. If this is the case, then give and capture deductions when you can.
You don’t care about the deductions. Yes, some people give because of their hearts and not their tax bills.
You can’t break the gift into pieces very easily or affordably to stretch over more years (e.g. giving real estate or private business interest that requires costly valuation work).

Consider Your Goals First

In most cases, we believe giving should first start with your heart and goals, and then be assessed against your financial plan and future income and tax expectations. While it may appear complex to assess your options, it could be an exercise that rewards you with more tax savings through the years and allows for you to direct more dollars to charities. So, look before your leap into 100%.

If you need assistance thinking about your giving strategies, we would be glad to help.

For additional reading, here are some good resources:

https://www.kitces.com/blog/100-agi-charitable-deduction-limit-cash-qualified-contribution/

https://www.ncfgiving.com/stories/how-to-leverage-100-agi-giving-in-2021/

charitable deductioncharitable givingtax planningtax savings

Mike Mulcahy, CFA® CPWA® CTFA

With the founding of Kings Path Partners, Mike brings a diverse set of professional and personal experiences into the wealth services business. His professional roles and community experiences give him a unique and real perspective into the needs of families, entrepreneurs, and business executives. Previous roles include president of a $6B investment management firm; management consultant with McKinsey & Company; VP of corporate finance & strategy with Compaq/HP; and managing director of an entrepreneurial web-based business. He is also an active venture investor with a focus on impact investing and social enterprises.

Mike earned an MBA from the Harvard Graduate School of Business and completed an Executive Program in Portfolio Management at the University of Chicago. He graduated summa cum laude with a Bachelor of Science in Economics with a minor in Chemistry from Texas A&M University. He holds designations as a Certified Private Wealth Adviser®, Chartered Financial Analyst®, and Certified Trust and Fiduciary Advisor (CTFA). He is a member of the Investments & Wealth Institute® and the CFA Society of Houston.

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