Charitable Strategies to Help Your Clients
One purpose of the $2 trillion stimulus bill, the Coronavirus Aid, Relief, and Economic Security Act, signed into law on March 27, 2020 (the “CARES Act”), is to support the not-for-profit community, in part by providing temporary charitable giving income tax incentives and related measures.
Under section 2204 of the CARES Act, a reduction in taxable income is available in 2020 for taxpayers who do not itemize their deductions. It is an above the line adjustment to income that will reduce a donor’s adjusted gross income (AGI) and thereby reduce taxable income. This adjustment is available for cash gifts to public charities, except gifts to donor-advised funds and supporting organizations. It is limited to $300 per taxpayer, $600 for a married couple filing jointly. Although not entirely clear whether this provision applies just for the 2020 tax year, this is the interpretation most authorities are adopting at this point, as the measure is intended to encourage the 90% of taxpayers who do not itemize to make more cash gifts to charity in 2020. Donors who prefer to itemize their deductions can still do so, to an even greater extent, as detailed below.
100% of AGI limit available in 2020 for cash gifts to most public charities
Pursuant to section 2205 of the CARES Act, for those who itemize, the CARES Act lifts the cap on the deductibility of individual annual giving from 60% of AGI to 100% for cash contributions for 2020. As with current law, any cash gifts in excess of that limit can be carried forward for five years. Cash gifts to donor-advised funds and supporting organizations do not qualify for this special election. The 100% limit is reduced dollar-for-dollar by other itemized charitable deductions.
This means that in 2020, a taxpayer who deducts 30% of AGI in long term appreciated property gifts and elects the 100% of AGI limit for qualified cash contributions will be able to also deduct up to 70% of AGI for qualified cash gifts, for a total deduction of up to 100% of AGI. If this taxpayer uses all of his or her available deduction for qualified cash gifts, the taxpayer would pay no federal income tax in 2020! Ordinarily, the total deduction would be limited to 60% of AGI and the taxpayer would have to carry forward the rest. This change presents a planning opportunity for clients wanting to make major gifts and planned gifts in 2020. However, we have studied examples and include one below which demonstrates that it will not always be to a taxpayer’s advantage to make the 100% of the AGI election. As always, each particular donor should consult his or her tax advisor to determine whether a 100% election in 2020 makes sense for them.
A single donor who has taxable income of $200,000 and is in the 32% federal income tax bracket. If this donor makes $200,000 in qualified cash contributions, makes the 100% of AGI election, and itemizes no other deductions, donor will pay no federal income tax in 2020, saving $45,015.50 in tax as a result. However, if donor doesn’t make the election, donor would deduct $120,000 and carry forward $80,000 to 2021. Assuming he/she can deduct the remaining $80,000 in 2021 and again has taxable income of $200,000, donor will save $31,625 in federal income tax in 2020 and approximately another $22,136 in 2021, a total tax savings over the two years of $53,761. A donor in the highest federal tax bracket, 37%, could see an even larger tax benefit by not taking the 100% election.
An additional benefit: for corporate charitable giving, the CARES Act raises the cap on deductibility of charitable giving from 10% to 25% of taxable income.
RMD Temporary Waiver
Hopefully, the above-described charitable giving tax incentives will offset the potential decline in charitable giving that may result from section 2203 of the CARES Act, which provides for a temporary waiver of the requirements for required minimum distributions (“RMDs”) for 2020. Since the RMD calculation is based on the account balance as of December 31, 2019, this will provide relief to many retirees whose retirement account balances have decreased in the wake of the coronavirus pandemic and economic downturn. The downside for the not-for-profit community is that many donors age 70 ½ or older have begun making qualified charitable distributions (“QCDs”) of up to $100,000 of their RMDs to qualified charities in recent years. It is our understanding that a taxpayer may still make a QCD in 2020 despite the waiver, but the suspension of the RMD will likely result in fewer people using their IRAs to make rollover gifts to charities in 2020.
Contact us with questions or assistance related to charitable giving and the CARES Act:
Mary Stanley, JD, CAP
Senior Director & Legal Counsel for Charitable Gift Planning
Sarah Weaver, JD
Senior Gift Planning Advisor & Assistant Legal Counsel