How the CARES Act May Affect Your Charitable Giving Plans in 2020
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. Its most widely known provision is that individuals earning below certain income thresholds will receive cash payments of $1,200 per person and $500 per child. However, the Act also contains several important provisions applicable to charitable giving.
“During this crisis, charities need more support than ever,” says Sharon Gueck, Portfolio Manager and Financial Planner at Becker Capital Management, Inc., and member of CCA’s Board of Directors and Finance Committee.“These new provisions provide a way for every taxpayer to benefit from making charitable gifts this year.”
The Act is extensive, addressing a wide range of issues within its 300-plus pages. Below, Sharon identifies the provisions that can help you fulfill your charitable giving goals this year.
New Charitable Deduction for Non-Itemizers
If you take the standard deduction, rather than itemizing your deductions, you will be able to claim a charitable deduction of up to $300 for cash donations made in 2020. “The great thing about this provision is that anyone who files taxes will benefit financially. For those who don’t itemize, it’s a valuable way to reduce your taxable income on your federal return,” says Sharon.
However, married couples should know that the deduction is applied per family, not per individual. “If you’re married filing jointly, you can only deduct up to $300 — not $600,” says Sharon. For those operating in a gray area, such as taxpayers who are married filing separately, Sharon suggests speaking to a tax professional.
Higher Deduction Limits for Individuals and Corporations
In 2020, those who itemize their taxes on Schedule A may be able to deduct cash gifts up to 100% of their adjusted gross income. For corporations, this provision also increased the amount that can be deducted for cash contributions to public charities, raising the cap to 25%, up from 10% prior to the legislation.
For donors taking advantage of higher deduction limits, Sharon warns that cash gifts are the only types of charitable donations that qualify: “Keep in mind the mechanics of the gifting. There was no change to the deduction limit if you’re using securities to fund your gift; that remains capped at 30% of your AGI. To qualify for the expanded limitation, gifts in excess of the charitable gifting thresholds must be made in cash.”
In addition, if certain qualifications are met, charitable gifts exceeding the limitations may be carried forward and used in the subsequent five years. Sharon strongly advises reaching out to a professional if this is something you’d like to consider.
Required Minimum Distributions (RMDs) Waived in 2020
For the year 2020, there will be no mandatory distributions from retirement accounts, thus allowing those accounts to recover. The minimum age for making a tax-free transfer from an IRA to a charity (a.k.a. a qualified charitable distribution, or QCD) remains at 70½, and the annual limit remains at $100,000. However, since cash gifts are deductible in 2020 to the extent of adjusted gross income, a person could withdraw and then contribute a larger amount—with the deduction helping to offset the taxable withdrawal. Says Sharon, “Keep in mind that you have to run the numbers to see what makes the most sense for your particular situation. A QCD direct to a public charity oftentimes results in a better outcome from a tax-planning perspective.”
If you’re deciding between a QCD and a charitable deduction, here’s the difference: QCDs are excluded from your taxable income, while cash gifts can be deducted up to a certain point in your tax return. “Because a QCD is excluded from your taxable income, this is a really great way to donate to public charities,” says Sharon. “It can actually be more beneficial than taking a charitable deduction, which would have more limitations in a typical year. Decreasing income may favorably affect your AGI-based phase-outs and Medicare Part B premiums. It’s so important to understand the tax-related pros and cons of your charitable giving strategies.”
If you’re over 70 ½ but under 72 and interested in making a qualified charitable distribution through your retirement account, Sharon recommends talking to a tax advisor first, as there are certain provisions that must be adhered to.
Waiver of Penalties When Retirement Funds Are Used for Coronavirus Purposes
If you are under the age of 59½ and withdraw money in 2020 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. You can withdraw up to $100,000 out of your retirement account, and although the distribution will be taxed at its ordinary income rate at the state and federal level, those taxes can be paid back over the next three years. Additionally, the amount withdrawn can later be added back to the account without regard to contribution limits.
Says Sharon, “Be mindful that although you don’t have to show proof of need, the withdrawal must be for a reason related to COVID-19. If that applies to you, you’ll need to contact your retirement plan administrator to start the process.”
Reinstatement of NOL Carrybacks for Businesses
The CARES Act permits net operating losses (NOLs) from the 2018, 2019, and 2020 tax years to be carried back to the previous five tax years (beginning with the earliest year first) and suspends the 80% of taxable income limitation through the 2020 tax year. The NOL carryback can result in an immediate refund of taxes paid in prior years. However, Sharon notes that this provision doesn’t apply to all entities, such as REITs, so it’s important to consult your tax professional regarding these changes.
Consult Your Financial Advisors and CCA
“Donors should always consult their tax professional prior to making any large gift, but especially now,” says Sharon. “One thing we’ve learned since March is that many of these programs continue to see changes, both in interpretation and application. While there are many resources available, your advisor is familiar with your tax situation and can provide valuable guidance on these new provisions.”
Consult your trusted financial advisors and contact your CCA gift officer to help with gift-planning opportunities, including estate planning and charitable gift planning.