With the passage of the Coronavirus Aid, Relief and Economic Security (CARES) Act in March, several changes to charitable income tax deductions have been made and new incentives put in place to encourage donors to increase charitable contributions in 2020. This year, increased donations could be especially beneficial and timely for attaining certain tax breaks as uncertainty surrounding COVID-19 persists and we prepare for a new presidential administration to take office in 2021. Thankfully, there are plenty of strategies that can guide smart, tax-efficient contributions.
Tax Changes Under the CARES Act
Certain charitable donors are eligible for additional tax relief on their 2020 tax return; however, there are limitations. The incentive only applies to cash contributions made in 2020. Contributions of property, appreciated stock, or any other asset do not qualify. Further, donations may only be made to public charities. Supporting organizations, private foundations, and donor-advised funds (DAFs) do not qualify. Additional highlights under the CARES Act:
- The adjusted gross income (AGI) limit for cash contributions has increased from 60 percent to 100 percent for individual donors; therefore, you may deduct up to 100 percent of your AGI for cash contributions made to charities in 2020.
- The AGI limit for corporate donors has also increased. Previously limited at 10 percent, corporations can now deduct up to 25 percent of taxable income in 2020.
- Donors who are not itemizing and instead plan to take the standard deduction can now claim an above-the-line deduction of up to $300 for cash contributions made in 2020.
Strategies to Consider
Identifying the best strategy for your unique situation is important, and you should always consult your financial and tax advisor for more information before moving forward. Given the incentives in place, the following are a few options that may benefit you:
- Because you can deduct up to 100 percent of your AGI in 2020, bunching several years’ worth of donations this year could result in a potentially larger deduction than usual. A charitable vehicle, like a DAF, would allow you to execute this strategy efficiently while receiving an immediate tax deduction.
- Converting a traditional IRA to a Roth IRA might be beneficial this year because your charitable deduction could potentially offset a majority – if not all – of the additional taxes you will face as a result of the conversion.
- If your gifts exceed your AGI deduction limit, you can carry the excess forward to another year, for up to five years. This applies to cash and non-cash assets.
- Those 70 ½ or older can consider utilizing a Qualified Charitable Distribution (QCD) this year. Through this vehicle, you can donate up to $100,000 in IRA assets per year tax-free to a charitable organization. This would lower your IRA balance and potentially reduce your taxable income and estate in the future.
- If you are over 59 ½, because up to 100 percent of your AGI can be deducted, you can consider transferring funds from your IRA to a qualified charity and using contribution deductions to offset tax liability. This strategy could also lower your taxable estate and limit tax liability for account beneficiaries.
Charitable giving is a selfless act with a wide range of benefits, but it is important for high-net worth individuals to make a plan for charitable dollars that aligns with financial goals. With the new incentives under the CARES Act and the increased need to help our communities combat the coronavirus pandemic, increasing your charitable donations in 2020 is both essential and advantageous. Connect with a member of our team today for more information about crafting a year-end giving strategy with maximum impact.