This year offers some unique opportunities for charitable giving. Congress passed the Coronavirus Aid, Relief and Economic Security (CARES) Act in March 2020, which included tax incentives for individuals and corporations to donate to charities. COVID-19 has impacted the economy and society in a so many ways, and Congress hoped the CARES Act would help increase giving in the country, when it is needed most.
Here are a few guidelines on how the CARES Act affects charitable giving in 2020:
In 2020, the adjusted gross income (AGI) limit for cash contributions increased for individual donors from 60 percent to 100 percent. For cash contributions made this year, individuals are entitled to deduct up to 100 percent of their AGI.
Corporate donors also received an increase in the AGI limit for cash contributions. Corporations can now deduct up to 25 percent of taxable income, which is an increase from 10 percent.
For Those Who Do Not Itemize
The CARES Act allows people who do not itemize on their 2020 taxes to claim a new deduction for charitable gifts made in cash of up to $300. Historically, people who claimed the standard deduction could NOT take advantage of any charitable contributions. But this year, charitable contributions of up to $300 can be deducted even for those who don’t itemize. Those using a tax accountant should provide any and all charitable contributions to them at tax time.
Donations Must Go Directly to Charities
It is important to note that the higher AGI limits discussed above for personal and corporate donors apply to cash contributions made directly to charitable organizations, NOT to cash contributions to donor-advised funds, supporting organizations, or private foundations – those limits remain. Also, the limit on donating appreciated assets to qualified charities remains at 30 percent of AGI.
Existing carry-over rules still apply, so if an individual’s donations in 2020 exceed AGI deduction limits, the donor may carry forward excess deductions for up to five subsequent tax years. Donors should consult with a tax advisor when considering charitable giving.
IRA Qualified Charitable Distributions (QCD)
The CARES Act did not change the rules around Qualified Charitable Distributions (QCDs), which allow individuals over age 70½ to donate up to $100,000 in IRA assets directly to a charity each year, without taking the distribution into taxable income. But since the CARES Act allows individuals to deduct 100 percent of their AGI for cash charitable contributions, this effectively gives individuals over age 59½ the benefits similar to a QCD. In other words, they can take a cash distribution from their IRA, contribute the cash to a charitable organization, and completely offset tax attributable to the distribution by taking a charitable deduction in an amount up to 100 percent of their AGI for the tax year.
This might be a good strategy for those planning to make a large donation in 2020, if they are between the ages of 59½ and 70½ and are not dependent on existing retirement funds.
Those who utilize a different firm for tax preparation and asset management should be sure to tell their tax accountant the amount of their IRA distribution that was given directly to charity. This way, the tax accountant can report this accurately on the tax return. The tax form produced by the asset management firm at year end (Form 1099-R) will NOT signify the “QCD portion” of the IRA distribution.
We encourage people to take advantage of these tax incentives when making charitable donations during this unprecedented year. As always, check with a tax professional if you have questions.
This tax information is general and educational in nature and should not be construed as individualized legal or tax advice. Content provided relates to taxation at the federal level only. Charitable deductions at the federal level are available only if you itemize deductions. Rules and regulations regarding tax deductions for charitable giving vary at the state level, and laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of the information provided. As a result, Chicory Wealth cannot guarantee that such information is accurate, complete, or timely. Tax laws and regulations are complex and subject to change, and changes in them may have a material impact on pre- and/or after-tax results. Chicory Wealth disclaims any liability arising out of the use of, or any tax position taken in reliance on, such information. Always consult an attorney or tax professional regarding individualized legal or tax situations.