Charitable Giving: Tax Planning Opportunities

The Coronavirus Aid, Relief, and Economic Security (CARES) Act, passed on March 27, 2020, includes several provisions expanding charitable giving incentives:

1. New Deduction Available (Must Take Standard Deduction)

The CARES Act makes a new deduction available for up to $300 per taxpayer ($600 for a married couple) in annual charitable contributions for taxpayers who take a standard deduction on their 2020 tax return. The deduction is calculated by subtracting the amount of the donation from your gross income. It is an “above the line” adjustment to income that will reduce your adjusted gross income (AGI), and thereby reduce taxable income.

To qualify, you must donate to a qualified charity. A donation to a donor-advised fund (DAF) does not qualify for this new deduction.

2. New Charitable Deduction Limits (Must Itemize)

If you itemize on Schedule A of your tax return, you can claim a deduction for charitable donations. Typically, the amount you can deduct for cash contributions is limited to 60% of your AGI and any cash donations over that amount can be carried forward for up to five years and deducted later.

The CARES Act lifts the 60% AGI limit for cash donations made in 2020 (there is a 100% AGI limit on all charitable contributions). This benefits taxpayers who itemize allowing them to deduct more of their charitable cash contributions this year. As with the new above-the-line deduction, donations to donor advised funds and supporting organizations do not qualify and the deduction is only for cash gifts to a public charity.

Additionally, corporations may deduct up to 25% of taxable income, up from the previous limit of 10%.

3. Qualified Charitable Distributions (QCDs)

A QCD is a direct transfer of funds from your IRA payable to a qualified charity. One of the benefits of a QCD is that it can be counted toward satisfying your required minimum distribution (RMD), as long as certain rules are met. Using your RMD as a charitable contribution excludes that amount from your AGI for the year, which means that in addition to reducing your income tax, it can also decrease the amount of Social Security that is subject to tax and potentially lower your Medicare premiums.

Even though RMDs are waived under the CARES Act for 2020, QCDs are still an option for those over 70 ½. Taxpayers who typically use a QCD for all or part of their RMD may not be inclined to do so as they do not have to take an RMD in 2020. However, there is still an indirect benefit to taking a QCD in 2020 as it reduces future RMDs.

Planning Opportunity: For charitable gifts in 2020, consider all of your options – should you give from a taxable account and claim an itemized deduction? Use a QCD? If your assets are substantial enough that you can give more than 60% of your AGI this year, you will not lose the deduction for the excess amount. If you give more than 100% of your AGI this year, you can carry the deduction forward to next year (as has always been the case).