To encourage more charitable giving in 2020 and to help charitable organizations recover from the pandemic, the CARES Act provides additional tax relief for donors on their 2020 tax return. Below we explain the new above the line deduction and eliminated contribution limit for charitable giving.
Above the Line Tax Deduction for Charitable Contributions
As a result of the Tax Cuts and Jobs Act of 2017 (TCJA), fewer taxpayers were able to itemize and receive a tax benefit from their charitable contributions because of the increased standard deduction. In turn, some donors lowered the amount of their contributions. The CARES Act re-incentivizes charitable giving by creating a $300 above the line deduction for qualified charitable contributions. This deduction is available to all taxpayers that take the standard deduction on their 2020 return.
This deduction is currently only available for 2020 contributions but could be changed by future legislation. To qualify, the donations must be in cash, not stock or donations of clothing or other property, and must be made directly to a qualifying charity, not certain private foundations or donor-advised funds.
Elimination of the 60% Charitable Contribution Limit
Under the TCJA, individuals that itemize are allowed a deduction for cash contributions to certain charitable organizations of up to 60% of their Adjusted Gross Income (AGI). If the amount of the individual’s contributions is greater than the 60% limit, the excess is carried forward and treated as a deductible contribution for the next five years.
Section 2205 of the CARES Act temporarily modifies the contribution limits for individuals and allows individuals that itemize to deduct qualified charitable contributions up to 100% of their AGI. The excess contributions will be carried forward for the next five years. These changes only apply to cash contributions made to a 50% charity, excluding supporting organizations and donor-advised funds. Stock donations and gifts to private foundations are still subject to the 30% of AGI rule.
Opportunity for IRA Distributions
Eliminating the contribution limit creates a huge opportunity for donors who want to make a significant impact to charities this year. Under these rules, a donor could take a significant distribution from their IRA, rather than the annual $100,000 limit, donate it to charity, and take a deduction for the full amount. If you’re considering leaving a large portion of your IRA to charity in your estate, this may be a year to consider a large gift especially if you are expecting to have a taxable estate. You could benefit from tax savings and also see the benefits your charitable donation produces during your lifetime.
Taxable Income Planning
More charitable contributions may allow some taxpayers to reduce taxable income to $0, which may sound very appealing. But that situation isn’t always ideal, especially if you have long-term capital gains and qualified dividend income. If you’re in the lowest two tax brackets, the federal tax on these income sources is 0%. If this is your situation, additional year end planning may be needed to make sure you’re maximizing your tax savings and coordinating with any existing charitable carryforwards.
Our advisors are closely following COVID-19 relief efforts and will continue to publish insights to keep you informed about potential tax impacts and benefits. Visit our COVID-19 Resource Center for more insights or contact Anders below to discuss how the CARES Act affects your tax and estate planning.All Insights