During 2020, the need for charitable giving has skyrocketed. To encourage extra giving during this difficult time, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) has created some tax incentives that apply to giving that is completed before December 31, 2020.
If 2020 has been a high-income year for you and you are thinking about making extra gifts yet this year, engage in some charitable giving planning before you write those checks. Charitable giving should be carefully planned for many reasons. First, it is important to determine where and how your gifts can have maximum impact. Second, it makes sense to utilize tax-efficient strategies and timing in making these gifts.
Two Gift Strategies for 2020 Year End
1. Make a cash gift.
This is the simplest way to give, and a cash donation generally entitles you to a tax deduction of up to 60% of your adjusted gross income (AGI). However, for 2020 only, the CARES Act increases the maximum charitable contributions limit to 100% of AGI
for “Qualified Charitable Contributions.” Qualified Charitable Contributions are defined as cash gifts to charitable organizations other than private foundations, supporting organizations and donor-advised funds.
For example: If an individual makes a cash contribution equal to 30% of AGI to a donor-advised fund and a cash contribution of 70% of AGI to a qualifying public charity, then the taxpayer can deduct the 70% donated to the qualifying public charity. The contribution to the donor-advised fund does not count in determining the 100% limitation.
2. Make a gift of appreciated assets.
You can also donate assets which have appreciated in value and have been held for more than one year and claim the fair market value of the contributed assets as a tax deduction of up to 30% of your AGI. Or, you can donate these assets valued at your cost and deduct up to 50% of your AGI. Assets that have been held one year or less can be donated but must be valued at your cost for a deduction (up to 50% of your AGI).
You can avoid capital gains taxes by donating appreciated assets directly, rather than selling them and then donating the after-tax sales proceeds.
Take Full Advantage of the CARES Act
The CARES Act allows you to utilize the 100% AGI limit if you want to gift both cash and appreciated assets. Unlike the 60% of AGI limit under prior law, the 100% of AGI limit for 2020 takes into account gifts of assets other than cash (property subject to the 20%, 30% and 50% AGI limitations). See the chart for AGI limitations by type of property at the end of the article New Charitable Contribution Opportunities Under the CARES Act
For example: If an individual contributes property equal to 25% of AGI to a qualifying public charity and contributes cash equal to 75% of AGI to a qualifying public charity, then the individual may deduct the full 100% of AGI.
Note that full use of the 100% of AGI contribution limit means that a portion of the contribution will reduce income in the lower tax brackets. As an example, a married couple will receive an average federal tax savings of only approximately 20% on charitable contributions that reduce the last $326,600 of taxable income. The couple may consider deferring a portion of the contribution or adopting another strategy, such as making a Roth IRA conversion, to maximize the tax benefit of the charitable contributions.
For example: If a married couple with $1,000,000 of taxable income (before a Roth IRA conversion) makes a Qualified Charitable Contribution of $1,000,000, then makes a $326,600 Roth IRA conversion, the Roth IRA conversion would be taxed at an average federal tax rate of approximately 20%.
The higher 100% contribution limit for Qualified Charitable Contributions is elective, and a separate election is available for each contribution. If no election is made, then the contribution would be subject to the regular 60% of AGI limitation. Contributions in excess of the limitations can be carried forward for five years.
A Word of Caution - Consider Possible Tax Changes Following the Election
Your 2020 charitable gift planning should take into account possible significant changes to the income tax rules that could be implemented next year if we have a new administration following the election. For more information on these possible changes, which may include higher tax rates and limits on tax deductions, see my previous article entitled Year-End Estate and Tax Planning for an Election Year.
Make a Plan for Your Year-end 2020 Charitable Giving
The 100% of AGI contribution limit for Qualified Charitable Contributions is available only for giving done in 2020. This is a great opportunity for high-net-worth families, but planning is needed to ensure that your year-end giving is both impactful and appropriate for your wealth transfer strategy now and into the future. Please contact your Warner trusts and estates attorney if you would like to explore charitable giving opportunities in more detail.