2020 is Almost Over (Phew!) and the CARES Act is Expiring
The CARES Act and 2020 Charitable Tax Benefits
Legislation known as the CARES Act introduced significant incentives to stimulate charitable giving in response to the Covid-19 pandemic. Some of those important tax incentives expire on December 31, 2020. Your donors will need to act quickly to take advantage of these tax-smart ways of giving before they are gone. Listed below are the most significant provisions applicable to charitable giving included in the CARES Act.
Higher Deduction Limit for Cash Gifts in 2020
Individuals in 2020 are entitled to an income tax charitable deduction for gifts of cash to public charities up to 100% of their adjusted gross income. The 100% of AGI deduction limit permits generous donors to completely offset their income tax liability for 2020 if they make cash gifts equal to their adjusted gross income. Donors with significant campaign pledges could accelerate future pledge payments into 2020 with cash and enjoy a substantial tax break. Charitable deductions for cash gifts that must be carried over to 2021 or beyond will be subject to the usual 60% of AGI limit.
The 100% of AGI limit expands the opportunities for donors to make gifts from their retirement accounts. The popular qualified charitable distribution (QCD), which assures a tax-neutral outcome for the donor, is limited to withdrawals of no more than $100,000 from IRAs by donors who are 70 ½ or older. Since cash gifts are deductible in 2020 to the extent of adjusted gross income, a donor can make a gift from their IRA, 401(k), or other defined contribution plan by withdrawing an amount equal to their AGI followed by a contribution of the proceeds to charity. In such a case, the 100% of AGI limit may make it possible for the donor’s charitable deduction to completely offset the taxable income from the withdrawal, enabling a donor as young as 59 ½ to make a tax-neutral gift in excess of $100,000 from their retirement plan.
Required Minimum Distributions Waived in 2020
The required minimum distribution (RMD) that requires minimum withdrawals from most retirement plans for certain taxpayers was suspended for 2020. One of the policy reasons for temporary suspension of the RMD was to permit retirement plan balances to recover from the economic impact of the pandemic. Even though the RMD is suspended for 2020, there are still reasons to complete a QCD in 2020. For non-itemizers, a QCD is a way to make a charitable gift and enjoy tax benefits similar to an itemized income tax charitable deduction. Others may have large retirement plan balances that will increase their income dramatically in the future when the RMD rules come back into effect. These individuals may want to reduce the balance of their plan balance by making a QCD in 2020 even though there is no RMD this year.
New Charitable Incentive for Non-Itemizers in 2020
In 2018 the standard deduction nearly doubled. The net effect of this change was that more than 46 million fewer taxpayers itemize their deductions. A donor taking the standard deduction does not realize tax savings for their charitable contributions. A complex web of factors influences annual philanthropy. Tax policy, tax rates, and economic conditions affect how much donors give. According to Giving USA, total charitable giving increased in 2019 despite many fewer donors being able to itemize their charitable gifts. Nonetheless, anecdotally, the loss of tax incentives for small annual fund donors materially reduced the number of these annual fund gifts in 2019.
To encourage continued annual support from small gifts, the CARES Act allows non-itemizers to reduce their taxable income by up to $300 for cash donations to public charities made in 2020, and then it expires. The $300 limit is the same for single filers and married couples who file jointly. Those who still itemize can continue to claim an income tax charitable deduction subject to their applicable limits. There has been discussion to increase the dollar limit for this special tax break for donors who do not itemize.
December 31, 2020 is fast approaching, and the CARES Act contains unique tax saving techniques that will soon disappear. Craft narrowly targeted messages to donors likely to be interested in the tax strategies offered by the CARES Act. Alert them to the pending expiration of the legislation and encourage them to act before year-end.