Did you know that The CARES Act—the Coronavirus Aid, Relief, and Economic Security Act— also provides enhanced charitable giving incentives?
New Charitable Gift Deduction Available
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 this change may be seen by some 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) will 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.