100% of AGI limit available in 2020 for cash gifts to most public charities: For the 2020 tax year only, donors may elect to waive the AGI limit on cash gifts to public charities (“50% charities”), creating, in effect, a new 100% of adjusted gross income (AGI) limit for these gifts. The election appears available separately for each contribution. That is, the donor could elect to waive the limitation for one qualified cash donation and not wave it for another. Gifts to donor advised funds (DAFs) or supporting organizations (SOs) are not eligible for this special election. The Act is silent on whether cash gifts to life income plans are eligible for the waiver. Our best advice is for donors who are considering a life income gift in 2020 to consult their own tax counsel on this question.
The 100% limit is reduced dollar-for-dollar by other itemized charitable deductions. This means that in 2020, a donor who deducts 30% of her AGI in long term appreciated property gifts and elects the 100% of AGI limit for qualified cash contributions will be able to also deduct up to 70% of her AGI for qualified cash gifts, a total deduction of up to 100% of AGI. If this donor uses all of her available deduction for qualified cash gifts, she would pay no federal income tax in 2020! Ordinarily, this donor’s total deduction would be limited to 60% of AGI and she would have to carry forward the rest.
A donor who makes the 100% of AGI election can carry forward unused qualified cash gift deductions up to 5 years. The carryforward will be subject to the normal 60% of AGI limit, as are cash deductions carried forward from past years.
The 100% election may not always be the tax-wise choice: Because federal income tax rates are progressive, it is not a given that it will be to a donor’s advantage to make the 100% of AGI election.
For example, a single donor who has taxable income of $200,000 is in the 32% federal income tax bracket. If the donor makes $200,000 in qualified cash contributions, makes the 100% of AGI election, and itemizes no other deductions, he will pay no federal income tax in 2020, saving $45,015. in tax as a result.
However, if he doesn’t make the election, he would deduct $120,000 and carry forward $80,000 to 2021. Assuming he can deduct the remaining $80,000 in 2021 and again has taxable income of $200,000, he will save $31,625 in federal income tax in 2020 and approximately another $22,136 in 2021, a total tax savings over the two years of $53,761. By taking his deductions over 2 years, he saves $8,745 in taxes.
A donor in the highest federal tax bracket, 37%, could see an even larger tax benefit by not taking the 100% election. Donors should consult their tax advisers to determine whether the 100% election makes sense for them.