We all want to ensure that we are considering tax moves that are smart, and help take full advantage of the deductions that are available to us. The tax codes are ever-changing, and it is important to understand how you get the best bang for your charitable donations.
Legislation known as the CARES Act, designed to rescue the economy from the effects of the coronavirus pandemic, was passed by Congress and signed into law by the president on March 27, 2020. The Act, officially named the Coronavirus Aid, Relief, and Economic Security Act, not only funds various health care needs but also provides financial relief for businesses, individuals, and institutions hit hard by the pandemic.
In recognition of the fact that charities’ fundraising efforts are impeded at the very time there is a tremendous need for their services, the legislation contains certain provisions beneficial to donors. Other provisions, while not directly applicable to charities, provide some gift-planning opportunities.
We have included several articles that may be useful and inform your year-end charitable decisions. As always, it is important to consult with your advisors.
How the New CARES Act May Affect Your Gift Planning:
New Charitable Deduction Available for Non-Itemizers
Under the CARES Act, taxpayers who do not itemize their deductions will be able to claim a charitable deduction of up to $300 for cash donations made in 2020. This means that you could add an additional $300 to your charity budget this year, recover a portion of it in tax savings, and help charities address extraordinary current needs.
Example: Suppose that you are over the age of 65 and your itemized deductions would total $12,000. You would claim the standard deduction of $13,700 rather than itemizing. If you give at least $300 in cash to qualifying charities this year, you can elect the standard deduction of $13,700 and also deduct $300 – for total deductions of $14,000.
Waiver of Retirement-Plan Penalties for Purposes Related to the Coronavirus
If you are under the age of 59½ and withdraw money from your retirement plan to cover expenses incurred by you or a family member related to treatment of the coronavirus, the 10% tax penalty will not apply, taxation of the distribution can be spread over three years, and you can add the amount you withdraw to the fund later without regard to contribution limits.
This does not affect charities in the near term, but it does allow retirement funds to be used for an immediate need while enabling retirement accounts to recover and be used in the future for family security or charitable purposes.
Charitable Deduction Limits Modified for Individuals
If you made a large cash gift in 2019, you could deduct it only to the extent of 60% of your adjusted gross income. This year, the CARES Act allows you to deduct it to the extent of your entire adjusted gross income.
Example: Suppose you had income of $300,000 in 2019, but from cash investments you made a cash gift of $500,000. Your previous deduction limit would have been $180,000 (60% of $300,000). In 2020, you can deduct $300,000. In both cases, the unused amount of the deduction could be carried forward and used to the extent of the limitation applicable to the carryover year.
Planning Pointer 1: Like the $300 deduction for non-itemizers, the modification of the contribution limit does not apply in the case of gifts for donor-advised funds and supporting organizations. The gifts in most cases must be to public charities like ours.
Planning Pointer 2: In the event you have made a multi-year pledge to a charity, you might want to accelerate payment of the pledge balance in 2020 if you can afford to do so. The charity would have the use of the money sooner – and you could use the deduction more quickly.
Increased Charitable Deduction Limits for Corporations
The contribution limit for corporations has been 10% of taxable income. For 2020, that limit has been raised to 25% for cash contributions. The purpose is to enable companies that are doing well in this economy to give more to their communities.
The Act also increases from 15% to 25% the percentage of taxable income certain corporations claim when they contribute food inventory for the needy. This may help replenish depleted food inventories at food banks.
Continue to stay safe and happy holidays!
Jim Fralin, Treasurer – Casa de Kids