As expected, charitable giving by individuals began to wane after the Tax Cuts and Jobs Act (TCJA) increased the standard deduction for millions of taxpayers. While the strong economic growth in 2019 and early 2020 did spur a sharp increase in giving, the sudden economic downturn was expected to lead to another decline. Anticipating that, Congress included incentives in the Coronavirus Aid, Relief, and Economic Security (CARES) Act to keep it alive.
Whether you itemize or not, there are still strategies available to make giving a win-win for both donors and charities.
Charitable Giving Incentives Under the CARES Act
Increased AGI Threshold: The TCJA limits the amount of deductible charitable contributions to 60% of Adjustable Gros Income (AGI) with a few exceptions. Under the CARES Act, the charitable deduction limitation has been increased to 100% of AGI for 2020. The increased limitation applies only to direct donations made to charitable organizations that make immediate use of the funds. It excludes contributions to donor-advised funds of private foundations, which allow for the pooling and deferring of gifted funds.
Above-the-Line Deduction for Non-Itemizers: The TCJA eliminated the need to itemize for millions of taxpayers, which also eliminated the ability to claim charitable deductions. Under the CARES Act, non-itemizers can reap the benefit of their cash contributions to public charities in 2020 with an above-the-line deduction of up to $300 per taxpayers.
Increased Corporate Limitation: For 2020, corporations may deduct charitable contributions up to 25% of their 2020 taxable income, up from 10% normally.
Top Charitable Giving Tax Strategies are Still Alive and Well
While the CARES Act's incentives should give charitable giving a much-needed, short-term boost, there are still favored giving strategies available for the charitably inclined at any income level.
Bunching Deductions: Since the enactment of the TCJA, an increasing number of taxpayers are turning to deduction bunching to overcome the higher standard deduction threshold. Deduction bunching involves delaying contributions until enough can be made in a future year to surpass the standard deduction threshold. This may or may not be required at the state level, depending on its standard deduction.
Qualified Charitable Distributions (QCD) from an IRA: This strategy allows individuals age 70 ½ and over to direct up to a $100,000 tax-free IRA withdrawal to a charity. While the donor does not claim a deduction for the donation, the withdrawal is not reported as income. This has the effect of lowering the taxpayer's tax liability by keeping AGI down. It has the added benefit of reducing any Social Security tax, decreasing Medicare premiums, and helping to avoid both the Alternative Minimum Tax (AMT) and Net Investment Income Tax (NIT).
Also, a QCD can satisfy the Required Minimum Distribution (RMD) from an IRA or 401(k) plan. A QCD strategy can be employed on an annual basis to avoid taking and paying taxes on RMDs.
For people who want to maximize their donations in 2020, taking a QCD can be especially beneficial when combined with the increased AGI limitation.
Donate Appreciated Property: Gifting appreciated assets has always been a highly favored way for individuals to make sizable donations. Donors who itemize may take a current year deduction for the asset's fair market value (subject to the AGI cap for non-cash contributions) while avoiding tax liability on the asset's appreciation. Assets must be held for at least one year to receive the fair market deduction.
Donating appreciating property can be more complicated than other non-cash donations. It's highly advisable to work with a tax professional to ensure its properly valued and the required forms are completed correctly.
Donor-Advised Funds (DAF): Donor-advised funds are becoming the gifting strategy of choice for people who want a more strategically based approach to their philanthropy. It's also favored because it can be established for as little as $5,000 with a sponsoring nonprofit organization. Donors may claim a tax deduction in the year the DAF is created, but the funds don't have to be distributed until the donor decides who and when the funds are to benefit. In the meantime, the funds remain in the DAF account, earning tax-free returns.
Charitable Trusts: For wealthier individuals, charitable trusts have always offered optimum gifting and tax planning opportunities. One of the more popular is a charitable remainder trust, in which a donor receives a current deduction on assets transferred into a trust, and can enjoy the income generated by the assets until they are eventually transferred to a charity based on predetermined terms. Setting up a charitable trust can be more complex than other strategies, requiring the coordination of an individual's estate attorney, tax professional, and financial advisor.
Between the temporary tax incentives under the CARES Act and the win-win benefits of proven charitable giving strategies, there are still opportunities to satisfy both your philanthropic and tax reduction desires. To ensure you optimize your contributions and your tax benefits, it would be essential to work with your tax advisor to take full advantage of current tax laws.