The holiday season always brings out the charitable inclinations in people, and this year will be no different. We may even see an increase in charitable giving due to provisions included in the Coronavirus Aid, Relief, and Economic Security (CARES) Act to incentivize more giving. As we wrote in our July 31, 2020 post, Tax Strategies That Are Keeping Charitable Giving Alive, the CARES Act may have prevented an expected downturn in charitable giving. Here’s an update on those provisions and how to utilize them between now and yearend.
Temporary Increase in Adjusted Gross Income Threshold for Itemizers
Thanks to the CARES Act, taxpayers who itemize can benefit from larger charitable contributions in 2020. The Tax Cuts and Jobs Act (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.
Cap on Qualified Charitable Distributions (QCD) is Lifted
The increase of the AGI threshold to 100% effectively expands the availability of an effective charitable-giving strategy. Normally, Qualified Charitable Distributions allowing IRA funds to be withdrawn tax-free and directly transferred to charitable organizations is limited to $100,000 for people over age 70 ½.
The donation is not tax-deductible, but the ability to withdraw funds tax-free has the effect of lowering the donor’s tax liability. 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). It also satisfies the required minimum distribution (RMD) for that year.
Due to the increased AGI threshold, taxpayers under age 70 ½ with $100,000 of AGI could conceivably take $200,000 from their IRA and give it to a charitable organization. The $200,000 withdrawal would be included in their AGI, but they would also receive a $200,00 tax deduction. While technically not a QCD, this temporary provision has the same effect but for larger contribution amounts and more people.
Special Above-the-Line Charitable Deduction for Non-Itemizers
The TCJA eliminated the need to itemize for millions of taxpayers, which also eliminated their 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.
According to the IRA, more than eight in 10 taxpayers take the standard deduction, which doesn’t allow for a separate deduction for donations. Taxpayers will find a new entry on their 2020 federal tax returns that allows them to report a cash donation up to $300. The entry will be “above-the-line,” meaning it will a part of the AGI calculation. The deduction will reduce the AGI, resulting in tax savings for making donations to qualified charitable organizations.
Cash donations can be made by check, credit card, or debit card. Deductions taken for cash donations must be supported by receipts, or cancelled checks, or with an acknowledgement letter from the charity.
There’s still time to take advantage of these special provisions to do some good while reducing your tax liability. In addition, other proven charitable giving strategies, such as bunching deductions, donor-advised funds, and charitable trust, are still alive and well. All are sound strategies but, to optimize their impact on charities as well as your tax liability, they do require planning.