What is the CARES Act?
The CARES Act is a $2.2 trillion economic stimulus package that was signed into law on March 27, 2020. The Act is far-reaching and contains many different elements aimed at providing economic relief to individuals and businesses facing hardship as a result of the current pandemic. The Act sends direct payments to eligible taxpayers, expands unemployment insurance, provides loans with “forgivable” terms to certain small businesses and non-profits, and gives borrowers of home and student loans more time to make payments. It also provides new charitable giving incentives.
How does the CARES Act impact philanthropic giving in 2020?
- New Charitable Gift Deduction
The CARES Act provides a new charitable-giving deduction that is available to those who choose the standard deduction method of filing their taxes (estimated to be 90% of taxpayers). The Act provides a deduction up to $300 per taxpayer in charitable cash contributions as an “above the line” adjustment to income, thereby reducing one’s Adjusted Gross Income (AGI), and as a result reducing overall taxable income. To qualify, you must give a donation between January 1 and December 31, 2020. Donations must be made to a qualifying public charity; donor-advised funds (DAF) and private foundations do not qualify for this new deduction.
- Expanded Charitable Deduction Limits in 2020
The CARES Act also provides expanded charitable deduction limits for businesses and individuals who itemize deductions on their tax returns.
In 2020, individuals can deduct cash contributions to qualifying organizations for up to 100% of their adjusted gross income. This is expanded from the previous limit of 60% of AGI. Businesses may deduct up to 25% of taxable income, up from the previous limit of 10%.
It should be noted that this expanded deduction is for cash gifts that are provided to a public charity. If you choose to give cash to your private foundation or donor-advised fund, the old deduction rules still apply. In addition, the expanded charitable deduction limit does not apply to gifts of appreciated stock.
If your assets are substantial enough that you can give more than your adjusted gross income this year, you won’t lose that deduction for the excess amount. As it was under the previous deduction rules, you can still use the excess amount as a deduction when you file your taxes next year.
- Suspension of Required Minimum Distributions in 2020
Giving directly from one’s IRA has been an attractive way to make a significant charitable gift. An IRA owner generally must take a required minimum distribution (RMD) from a retirement account when that owner reaches a certain age (either 70 ½ or 72 years of age). A gift given directly from an IRA, other than a SEP or SIMPLE IRA, to a qualified charity serves as a qualified charitable distribution (QCD). Amounts distributed as a QCD can be counted toward satisfying your RMD for the year, up to a maximum of $100,000.
With the passing of the CARES Act, RMDs have been waived for 2020 to help retirement accounts recover from potential stock market losses. This includes distributions from IRAs as well as 401(k), 403(b) and 457(b) plans.
Although some may see this change as a disincentive to use one’s IRA to make a charitable gift, it should be noted that even with the waiving of RMDs for one year, donors directing a QCD to charity in 2020 (up to $100,000 per individual) would still be able to reduce their taxable IRA balance. This allows all taxpayers – itemizers and non-itemizers alike – to direct gifts from their IRA to charities of their choice in a tax efficient manner.
What should I keep in mind in regard to philanthropic giving in 2020?
First, the above-the-line deduction of $300 cash contributions per taxpayer allows a tax deduction those who would not otherwise be able to benefit from these contributions. When gifts of up to this amount are given, it correspondingly reduces your taxable income by that amount. For some, this may not be viewed as a large amount, but it is $300 you won’t have to pay taxes on. So for those inclined to give cash gifts in 2020, this provides a good incentive to do so.
Second, the expansion of charitable deduction limitations to 100% of AGI opens the possibility of transformative giving in 2020. If you are in a position to do so, your gift will be fully tax deductible for up to 100% of your taxable income in 2020 – or even beyond 2020 if you opt to carry over gift amounts beyond your income for the next 1-5 years. While this incentive may not be feasible for those who have been hit hard by the pandemic, it provides a tax efficient way of making a significant impact for those in a more favorable financial position.
Both of these incentives apply to cash gifts given in 2020. This makes sense, as these incentives are part of an overall bill aimed at stimulating the U.S. economy. In fulfilling philanthropic objectives, cash gifts should be foremost on donors’ minds as a primary method of giving in 2020. But that doesn’t mean there aren’t other gift-giving methods to consider.
As noted previously, the CARES Act suspended required minimum distributions (RMDs) from most qualified retirement plans, including IRAs. This could reduce the incentive for some to make charitable distributions from IRAs in 2020. (The IRA charitable rollover remains available in 2020.) For example, a taxpayer with an RMD of $100,000 who usually makes $50,000 in IRA charitable rollover gifts each December may choose to make no IRA charitable gift in 2020 and instead make $50,000 rollover gifts in January and December 2021 to satisfy the RMD requirement in 2021.
On the other hand, because of the 100% charitable gift deduction allowed for cash gifts to certain charities this year, a taxpayer who has attained age 59 ½ can in effect make a tax-free rollover of any amount to a charity in 2020. The IRA can sell its assets and distribute the cash proceeds to the IRA holder, who can then give them to charity and deduct them in any amount, up to 100% of AGI (or beyond if the excess is carried over to subsequent years).
We are happy to speak with you and discuss how your giving in 2020 can be maximized by the recent passage of the CARES Act. If we can help in any way, please contact Rada Starkey, Director of Advancement, at firstname.lastname@example.org to set up a call. As always, we encourage you to consult an attorney or other professional advisor experienced in estate planning and tax law for more complex considerations.