The Coronavirus Aid, Relief and Economic Security Act (CARES Act) created incentives to make charitable contributions in 2020.
With a Standard Tax Deduction
If you will claim the standard federal tax deduction for 2020, the CARES Act offers an above-the-line deduction for up to $300 per taxpayer ($600 per married couple) for cash donations made to a charity other than a private foundation, supporting organization or donor-advised fund. Since this is an above-the-line deduction, it will reduce your adjusted gross income (AGI), and thereby reduce your taxable income, by the amount you donate up to $300 (or $600).
With Itemized Deductions
If you will itemize deductions for 2020, the CARES Act increases the maximum charitable contributions limit from 60% of Adjusted Gross Income (AGI) to a 100% of AGI limit for “Qualified Charitable Contributions” as described below. In essence, charitably-inclined individuals may be able to completely offset their taxable income for 2020. This opens the door for many other planning opportunities.
Qualified Charitable Contributions are defined as cash gifts to charitable organizations other than private foundations, supporting organizations and donor-advised funds. However, unlike the 60% of AGI limit under prior law, the 100% of AGI limit takes into account gifts of property subject to the 20%, 30% and 50% limitations.1
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. However, 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.
Full use of the 100% of AGI contribution limit means that a portion of the contribution will reduce income in the lower tax brackets. For 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 to maximize the tax benefit of the charitable contributions.
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 60% of AGI limitation. Contributions in excess of the limitations can be carried forward for five years.
In Conjunction With Roth IRA Conversion
A married couple contemplating full use of the 100% of AGI contribution limit may also consider making a Roth IRA conversion. For example, if the couple with $2,000,000 of taxable income (before a Roth IRA conversion) makes a Qualified Charitable Contribution of $2,000,000, then makes a $326,600 Roth IRA conversion, the Roth IRA conversion would be taxed at an average federal tax rate of approximately 20%.
Don’t Forget Qualified Charitable Distributions
Individuals with IRAs should also consider a “Qualified Charitable Distribution” (QCD) from their IRA. The QCD rules allow IRA holders over age 70 ½ to direct up to $100,000 to a charitable organization from their IRA. The QCD rules require that the IRA funds be directed to charities other than private foundations, supporting organizations and donor-advised funds.
Plan Your 2020 Charitable Giving Now
The 100% of AGI contribution limit for Qualified Charitable Contributions is available only for 2020 and creates interesting planning opportunities. Please contact your Warner trusts and estates attorney if you would like to explore these opportunities in more detail.
Under law prior to the CARES Act, charitable contributions have different limitations on AGI depending on the type of property and the type of charitable organization. The limits may be summarized as follows:
|Type of Charitable Organization
||Appreciated long-term capital gains property (marketable securities only)
||20% of AGI
||Appreciated long-term capital gains property
||30% of AGI
||Appreciated long-term capital gains property (marketable securities only) and cash
||30% of AGI
|General limit for cash and property gifts to all organizations
||50% of AGI
|Public charities, Supporting Organizatoins and Donor Advised Funds
||60% of AGI