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Advisor's Quarterly Update

Giving and The CARES Act

The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, which the President signed into law on March 27th, provides more than $2 trillion in relief touching nearly every corner of the U.S. economy: large and small businesses, health care providers, non-profits, individual citizens, and on and on. Included in its 880 pages are several provisions related to charitable giving that may be of particular interest to your clients. Let’s review.

  • 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.

  • Non-itemizers eligible for $300 charitable deduction: A reduction in taxable income is available in 2020 for donors who do not itemize their deductions. It is an “above-the-line” adjustment to income that will reduce a donor’s AGI and thereby reduce taxable income. This adjustment is available for cash gifts to public charities (“50% charities”) only and is limited to $300 per taxpayer ($600 for a married couple). It is not available for gifts to DAFs or SOs, nor for cash deductions carried forward from prior years. This change will be welcomed by the 90% of taxpayers who do not itemize in 2020. Donors who prefer to itemize their deductions can still choose that option.

    The text in the Act is ambiguous as to whether this provision applies just for the 2020 tax year or for future years as well. The best interpretation appears to be that it applies for 2020 only.

  • Required minimum distributions waived in 2020 for most donors: Individuals will not have a required minimum distribution (RMD) in 2020- from IRAs, 401(k)s, 403(b)s and most other defined contribution plans maintained by an employer for individuals. While an individual may not have to take an RMD from their IRA in 2020, everyone is still allowed to make a qualified charitable contribution (QCD) in 2020 if 701/2 or older. A QCD gift allows itemizers and non-itemizers alike to direct up to $100,000 annually from their IRA to charities in a tax efficient manner.
  • Limit on cash contributions from corporations increased to 25% in 2020: The taxable income limit that applies to cash contributions made by corporations to “50% charities” (again, except excluding DAFs and SOs) is increased from 10% to 25% for 2020. The usual 10% limit still applies to other charitable contributions by corporations, and those contributions reduce the 25% limit dollar-for-dollar. Qualified cash contributions in excess of the 25% limit can be carried forward for up to 5 years under the usual limits. This change should encourage more corporate giving than would have otherwise occurred this year.
  • Limit on contributions of food inventory increased to 25% in 2020: The limitation on deductions for contributions of food inventory by any trade or business is increased from 15% to 25% for 2020. This change should encourage more food donations in 2020 from businesses of all types.

The CARES Act has been made necessary by a terrible pandemic. Foremost in all of our minds are acute concerns about the continued health and financial wellbeing of those we care about. Nevertheless, many of our supporters have expressed interest in doing what they can to help others less fortunate and we hope this information has been helpful to you as you develop charitable plans with your clients.