How The CARES Act Impacts Charitable DeductionsSubmitted by Reby Advisors | Certified Financial Planners | Danbury, CT on April 17th, 2020
By George Koeltl, CFP®, April 17, 2020
It’s no surprise that non-profit organizations have been struggling due to the COVID-19 pandemic. In-person fundraising events are inappropriate or disallowed, and it’s challenging to tastefully ask for donations during a time when many donors face economic hardship themselves.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law on March 27, 2020, includes provisions designed to encourage charitable giving through additional tax deductions. Here’s what you need to know:
An Above the Line Charitable Deduction
It’s a small perk, but worth taking. Taxpayers who do not itemize – which includes many New York and Connecticut residents now that the state and local tax (SALT) deductions are capped at $10,000 – may deduct up to $300 of cash gifts made directly to a public charity. The donation must be made in 2020 to qualify (excess contributions from previous years cannot be used), and the gift cannot be made to a supporting organization or donor advised fund.1
The 60% Percentage Limit on Cash Gifts Suspended
The current law limits charitable deductions to 60% of adjusted gross income (AGI)2. For example, if your AGI is $100,000, you can deduct up to $60,000 in charitable gifts. The CARES Act has eliminated the 60% limit in 2020; in the previous example, the donor could give $100,000 and bring AGI down to $0. In this scenario, the taxpayer would have to itemize deductions.
Moreover, gifts in excess of 100% of AGI may be carried over to subsequent tax years (but subject to normal percentage limits in those years).
As with the $300 above the line deduction mentioned above, suspension of the 60% limitation does not apply if the gift is made to a donor advised fund or a supporting organization. The government is encouraging direct cash gifts now, when so many non-profits are in need.
2020 Deduction Limits for Corporations
The deduction limit for corporations has been increased from 10% of taxable income to 25%. Moreover, the limit on contributions of certain food inventory has also been increased to 25%.3
Tax Minimization Strategies to Consider
With required minimum distributions (RMD) from 401(k) and IRA accounts suspended for 2020, the qualified charitable distributions strategy becomes less impactful as a tax minimization tactic because, if you really want to avoid paying income taxes on distributions, you could simply not take the distribution.
The CARES Act does give donors, even people who aren’t retired and RMD eligible, additional options, including:
- Sell any amount of securities from a 401(k) or IRA account and donate it to charity, completing offsetting the ordinary income from the distribution. Previously, only 60% of the distribution could be deducted.
- Sell securities in a non-retirement account that have declined in value at a loss, and then donate the cash to charity. You would then have a capital loss which can be harvested to offset future capital gains, and could deduct the charitable donation from any 2020 ordinary income from a salary, distributions from retirement accounts or other sources.
- Sell securities in non-retirement accounts that have increased in value, and immediately offset the capital gains by selling other securities at a loss. You could then use the cash from the sale of both securities as a donation to charity and claim the deduction on any ordinary income you have.
Contact Reby Advisors for Advice Prior to Making a Decision
These are challenging economic times. If you are in a position to continue donating to charities and non-profit organizations that are dear to your heart, be sure to make the tax code work for you to the greatest extent possible.
As always, please consult with your tax professional or financial advisor in advance so that you know how your decision today impacts your long-term tax strategy and financial plan.