Charity in Crisis
Published On: April 29, 2020
Written by: Ben Atwater and Matt Malick
With over 1,000,000 Americans testing positive for COVID-19, we are staring down a health emergency. In response, social distancing measures are precipitating an unrivaled economic emergency, including the unemployment of more than 26 million Americans. For too many this is a time of not only sickness and death, but of loneliness and desperation.
Recognizing the extent of this national emergency, on March 27th Congress passed the Coronavirus Aid, Relief and Economic Security (CARES) Act. This legislation provides financial relief for individuals, small and large businesses and nonprofits, as well as increased charitable giving incentives for individuals and corporations.
With our nation and our local communities in crisis, some clients are leveraging the CARES Act incentives and making much needed gifts in these difficult days.
For taxpayers who do not itemize their deductions, the Act allows an above-the-line deduction for cash contributions of up to $300. Even if you claim the standard deduction in 2020, you can additionally write-off up to $300 in charitable giving.
Next, for those who itemize their deductions, the Act has increased deductible income limits for cash contributions by individual and corporate donors. Individuals can deduct up to 100% of their adjusted gross income (AGI) in 2020. Corporations can deduct up to 25% of their taxable income. These temporary 2020 increases raise the limits from 60% and 10%, respectively.
These simple changes are for cash contributions in 2020 only. Contributions to donor advised funds and supporting organizations do not qualify. Existing carryover rules of five years still apply for contributions over deductible income limits.
The change to 100% of AGI opens the door for those over 59 ½ years old to make charitable contributions using IRA funds. Previously, for most, it only made sense to use an IRA for charitable giving if you were over 70 ½ by leveraging a Qualified Charitable Distribution (QCD). A QCD allows those over 70 ½ to make a direct gift of up to $100,000 annually from an IRA to a public charity without incurring tax.
Gifts from IRAs other than QCDs were generally not feasible because any withdrawal from your IRA is taxable as income in the year of withdrawal. Since you could only deduct 60% of your AGI in any one year, taking money from your IRA to give to charity typically resulted in a tax bill. However, with 100% of your AGI deductible in 2020, you can take a cash distribution from your IRA, contribute it to charity, and you may completely offset the tax attributable to the distribution with a deduction. You must be over 59 ½ to remove money from an IRA without a 10% early withdrawal penalty though.
Even with the 100% AGI deductibility limit, it still might make more tax sense for a donor to give appreciated property in order to avoid the capital gains tax on that property. CARES offers no relief in this area, but, it is worth remembering that existing law allows you to deduct up to 30% of AGI when you give appreciated securities to a donor advised fund and you can carryover amounts in excess of the 30% for five years.
If giving appreciated property is what makes the most sense for you, you may want to act quickly to establish a donor advised fund and make the contribution in order to help the community at this most pivotal of times.
As our national emergency pulls our community apart via social distancing measures, it also pulls us together as we rally around our friends, family and loved ones to offer support in these crucial days. If you are seeking to help your community, please contact us to discuss how to best leverage new and existing tax laws that will serve to multiply the impact of your giving.