The $2.2 trillion stimulus package – known as the CARES Act – passed by Congress and signed by the President on March 27 created strong incentives for charitable giving in 2020 to meet the needs of people tragically affected by Covid-19. There are provisions for both modest and more affluent donors alike.
Tax deductions for charitable contributions have historically been limited to those taxpayers who itemize their deductions on Schedule A. The 2017 Tax Cut and Jobs Act made it even harder to take the charitable contribution deduction, by doubling the standard deduction and eliminating the ability to itemize for most taxpayers.
But to encourage charitable giving to organizations assisting those thrown into need by the coronavirus pandemic, Congress created a new, $300 above-the-line deduction for taxpayers who take the standard deduction, beginning in 2020. Above-the-line deductions reduce adjusted gross income for eligible taxpayers before determining whether to take the standard deduction or to itemize. While it is not entirely clear, from the way the legislation was drafted, it appears logical that married couples filing a joint return may make $600 in deductible gifts. The deduction is only for cash gifts made to public charities.
This may not seem like much. But if just 1,000,000 taxpayers take advantage of this break, that will mean $300,000,000 available for those thrown out of work or off of their health insurance.
The tax law contains a complex maze of limitations for how much you can deduct for charitable contributions on Schedule A in a given year. The limits are based on: 1) your Adjusted Gross Income (AGI), 2) whether the gift is cash or appreciated property and 3) whether the recipient is a private foundation or a public charity.
Current law allows for a deduction up to 60% of AGI for a cash contribution and 30% for a contribution of long-term appreciated property (such as stock) to a public charity. For contributions to a private foundation, the limit is 30% of AGI for cash contributions and 20% of AGI for appreciated property. Contributions in excess of the limitations, may be carried forward, by category, for five years. The interplay between these rules is complicated and all laid out in IRS Publication 526. And be sure to consult your tax advisor for detailed planning.
The CARES Act has raised the limit for cash contributions to public charities to 100% of AGI for 2020 only. The excess contribution (above the normal 60% of AGI) may not be made to a Donor Advised Fund, but must be for the charity’s general account.
If your AGI, for example, will be $150,000 in 2020 and you are fortunate enough not to need the income to live on, you may give all of it to charity and receive a deduction for the full amount; essentially zeroing out your tax liability. The 100% limit is reduced dollar-for-dollar by other itemized charitable deductions. So if you deduct 30% of AGI for donations of appreciated property ($45,000 in this example) you will be able to deduct an additional $105,000 for cash gifts made in 2020. Of course, you should consult your tax advisor to see which approach is best for you.
The deduction limitation on corporate charitable contributions has been increased from 10% of taxable income to 25% of taxable income.
A separate provision of the CARES Act suspends, for 2020, Required Minimum Distributions (RMD’s) from IRA’s and other retirement plans for those taxpayers over age 72 (used to be 70 1/2). What does this have to do with charitable giving? Donors over age 70 1/2 are allowed to use their IRA to fund direct Qualified Charitable Distributions (QCD’s) from their IRA to charity in lieu of the RMD, up to $100,000 annually. This functions as a charitable deduction because the RMD would otherwise be taxable and the QCD excludes that amount from income. Since the RMD is suspended for 2020, there is less incentive to utilize the QCD. Accordingly, in 2020, donors should look to make their charitable contributions from outside their IRA, if possible, and take advantage of the 100% AGI threshold. Then make a QCD in early 2021.
We are all familiar with GivingTuesday, the first Tuesday after Thanksgiving, when donors world wide are encouraged to make their year-end charitable contributions. Nearly $2 billion was raised in December 2019.
As an encore, the organizers have launched #GivingTuesdayNow, a global day of unity, in response to the unprecedented need caused by Covid-19.
That would be a great day to take advantage of these tax changes.