Individual and corporate taxpayers historically look to the fourth quarter to solidify charitable giving opportunities and crystalize tax-efficient strategies. Although 2020 has been unprecedented in many ways, and even with ever-present socioeconomic unrest which has given many Americans great pause, there has been an unexpected uptick in year-to-date charitable giving. The Coronavirus Aid, Relief, and Economic Security (CARES) Act has provided taxpayers with an abundance of options to lower their 2020 tax burden by leveraging new charitable offsets.
Charitable Deduction Available for All Taxpayers: With the passing of the CARES Act, taxpayers who typically take the standard deduction will now be eligible for up to a $300 charitable deduction ($600 for married individuals filing a joint return). This is an “above the line” adjustment to income for taxpayers who do not itemize, thus decreasing taxable income. NOTE: Cash contributions made directly to qualified charities will be eligible. However, those made to donor-advised funds or private foundations will not qualify.
Increased Charitable Deduction Limits: As a result of the CARES Act, charitably inclined donors who itemize in 2020 can elect to deduct up to 100% of their Adjusted Gross Income (AGI) for cash donations. Further, should giving exceed 2020 AGI limits, excess contributions will not be lost, but carried forward for up to five years. NOTE: The increased 100% limitation is only for taxpayers who make cash gifts directly to qualified organizations and not to donor-advised funds or private foundations.
UNPRECEDENTED GIVING STRATEGIES
Give in excess of 2020 AGI limits and carry over surplus for five years: While non-cash gifts or those gifts made to donor-advised funds will not qualify for the 100% AGI limit, donors may seek to give in excess of their 2020 deduction limit to take advantage of the five-year carry-over provision.
Bunch contributions into 2020: Donors finding their estimated total itemized deductions falling just below the standard deduction amount for 2020, as well as those scheduled to participate in large giving plans over the next several years, should consider the outcome of stacking or aggregating their charitable intentions in the current year. Frontloading such large charitable donations may result in lowering their combined total tax liability over the next several years.
Consider the use of retirement assets: Although Required Minimum Distributions (RMDs) for 2020 have been suspended until 2021, charitably inclined donors who were 70 ½ or older in 2020, can still direct up to $100,000 per year tax-free from their traditional Individual Retirement Accounts (IRAs) to qualified operating charities. If filing a joint return and each taxpayer owns an IRA, $100,000 from each IRA can be directed to a qualified charity. While the income tax benefit is on hold for 2020, there is still an estate tax benefit afforded by lowering the donor’s taxable estate and future tax liabilities observed by the IRA beneficiaries. NOTE: Starting in 2020, the RMD age increased to 72. Qualified Charitable Distributions can still be made if 70 ½ or older in 2020.
While the new rules and limits do not have a beneficial impact on gifting of appreciated property, such charitable donations continue to be viable due to the potential capital gains tax savings on the asset appreciation. Additionally, several states, such as New York, did not adopt the CARES Act, so individual deduction limits should be evaluated on a state-by-state basis. Please contact your Friedman LLP professional advisor to discuss optimizing your 2020 charitable contributions.