The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which was passed by Congress and signed by President Donald Trump on March 27, includes a wide variety of provisions. Many are designed to provide immediate help to the U.S. economy, devastated by the coronavirus pandemic and the “stay-at-home” mandates.
Americans typically give to a myriad of charitable organizations and especially ones on the frontlines of service. With more than 38 million people on unemployment in the U.S., at least temporarily since mid-March, many of these charities are seeing donations dry up in the current economic environment. Thus, the CARES Act includes several provisions to encourage charitable giving, such as:
An “Above-the-Line” Charitable Deduction
- Allows taxpayers who do not itemize deductions to deduct up to $300 for cash gifts made in 2020
- Non-operating private foundations, supporting organizations and donor-advised funds are not eligible to receive these contributions
Strategy: If your deductions are less than the standard deduction for 2020 ($24,800 if married filed jointly or $12,400 if single), or if you do not want to go through the hassle of itemizing your deductions, you can make a $300 cash gift to a public charity and claim it on your 1040 tax return. You will list the $300 donation as an adjustment to your income on Schedule 1 of Form 1040 and then deduct it from your gross income, along with other adjustments to income, on page one of Form 1040
Suspension and Relaxation of Percentage Limitations for Cash Gifts
- Cash contributions are deductible in 2020 up to 100% of “Modified Adjusted Gross Income” (MAGI). (It reverts to a limit of 60% again beginning in tax year 2021)
- Thus, an individual could deduct 100% of their income in 2020 from Federal taxes (State taxes would likely still be due, depending upon your state of residence)
- There is the normal five-year carry-over deduction for gifts in excess of 100% of current 2020 MAGI
- The same limitations exist as described above for non-eligible charities
- The deduction is not automatic but must be elected
– It is unclear in the CARES Act what this means, but there will undoubtedly be further guidance from the IRS when the time comes to file 2020 tax returns
Strategy: if you were originally planning to give money to a public charity over a few years, it may be better to “stack” the giving all in 2020 as up to 100% of MAGI is deductible. If your original intention was to donate $100k over the next three years and your MAGI is $300k, you can donate $300k in cash in 2020 to the public charity(ies) of your choice and deduct all of it as an itemized deduction on your tax return |
Corporations Can Also Deduct a Greater Percentage of Income in 2020
- Allows a deduction of cash gifts from corporations up to 25% of their taxable income. (It reverts to a limit of 10% again beginning in tax year 2021)
- The corporation can carry forward and use any gifts in excess of 25% in 2020 of their taxable income over the following five years
- The deduction is not automatic but must be elected
– It is unclear in the CARES Act what this means, but there will undoubtedly be further guidance from the IRS when the time comes to file 2020 tax returns
| Strategy: A corporation that is already giving to charity can reduce its taxes by accelerating its cash donation to a public charity and receiving a deduction up to 25% of its taxable income. This will help the charity and provides the corporation with a substantially greater tax deduction currently than it would normally receive |
Increased Deduction Limits on Food Inventory Contributions
- Increases the limits on contributions in 2020 for certain food inventory under Section 170(e)(3)(C) of the Internal Revenue Code
- The deduction is 25% of Modified Adjusted Gross Income (MAGI). (It reverts to a limit of 15% again beginning in tax year 2021)
| Strategy: A business has excess food inventory and can donate it to a public charity in 2020 and receive a deduction up to 25% of its MAGI |
Maximizing Deductions for Individuals
- Gifts of stock in 2020 do not benefit from the temporary charitable deduction enhancements – they are not a “Qualified Charitable Contribution”
Strategy: A donor with stock which has declined in market value below the purchase price should sell it at a loss and contribute the cash proceeds to charity. This is true every year, but in 2020, qualifying cash donations can be deducted up to 100% of income to offset Federal income tax. Additionally, selling stocks at a capital loss can also be used to offset a capital gain from the sale of an appreciated asset |
Suspension of Qualified Plan Minimum Distributions
- The CARES Act suspends required minimum distributions from qualified retirement plans, including IRAs in 2020
- Using your IRA to make charitable gifts from (the “Qualified Charitable Distribution” rule) is still in effect for individuals age 70½ or older. Gifts up to $100,000 in 2020 may be made directly from an IRA to a qualified charity. Donors will not pay any federal tax on the gift from the IRA, nor pay a Medicare premium surtax for increased income either
| Strategy: Individuals age 59½ or older can withdraw an unlimited amount from their IRAs in 2020 and deduct 100% of the withdrawal if cash is given to a public charity |
Conclusion: 2020 is a Great Time to Make a Large Charitable Contribution
As you can see from the provisions in the CARES Act, 2020 is THE year to make large charitable contributions. Remember . . . the above provisions are good only for 2020 and will expire in 2021 with one exception. The $300 above-the-line charitable deduction will apply in 2021 and future years if you do not itemize deductions.
Do you have a desire to help others less fortunate? This is the year to especially do something. The needs are great! Let’s talk about how you can help offset the devasting economic effects of the coronavirus or other needs close to your heart. Let’s discuss your available options and how to maximize the amount of deductions available to take. Making an unlimited income and paying 0% in taxes to the federal government . . . while helping charities and your fellow Americans during these challenging times when they are most in need . . . “Imagine That™!“
Written by R. J. Kelly – May 2020
Image by HeatherPaque on Pixabay
Pingback: How to Reduce Taxes With a "Pooled Income Fund" - Wealth Legacy Group®, Inc.