The federal government has made efforts to encourage charitable giving and to protect your assets for the 2020 tax year. Other changes may be on the way and we’ll keep you updated as we understand how they will impact us all. Here are a few of the changes that have come from the recent CARES Act.
Deductions for cash contributions to public charities can now qualify for up to 100% of adjusted gross income (normally limited to 60%).
For donors who choose to itemize, the increase in the adjusted gross income (AGI) threshold from 60% to 100% could make large gifts more appealing in 2020. Normally if someone donates an amount equal to their yearly income, they could deduct 60% of their income for that contribution. In 2020, this same gift creates a deduction that could “cancel out” someone’s tax bill! As in past years, unused deductions can be applied to future tax bills for up to five additional years, and those additional years will be subject to the traditional 60% AGI limitation. It would be wise to check with a CPA to see if this makes the most tax sense as spreading a gift between multiple years might still be more advantageous.
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. Gifts to Donor Advised Funds (DAFs) or Supporting Organizations (SOs) are not eligible for this special election but a Charitable Gift Annuity (CGA) funded with cash would be. This could make 2020 an ideal year to set up a CGA that pays donors for life.
Required minimum distributions from individual retirement accounts are waived.
By waiving required minimum distributions (RMDs) for 2020, donors are not required to take their minimum distribution but they are still able to request qualified charitable distributions (QCDs), also known as IRA Charitable Rollovers. In a standard year, donors can direct their IRA plan administrator to make charitable contributions from their retirement account, thereby reducing their income tax and fulfilling their RMD. The tax law left the ability to make these QCDs starting at age 70 ½ even though the age for required minimum distributions has been moved to age 72. And since heirs must pay taxes when they receive money from inherited IRAs, even though there is no requirement to take money this year, it is still an excellent source of charitable giving for the philanthropically inclined. In fact, combined with the 100% deduction available in 2020, even younger donors may want to consider a large gift from an IRA or other retirement account. At age 59½, donors can withdraw from their retirement accounts without penalty. These withdrawals count as income, and that income can be offset through gifts to charity. The increased deduction of 100% could make this a one-time opportunity that makes sense for donors who would make a significant gift from an IRA or other retirement account like a 401(k) because it’s simply a cash gift as opposed to QCDs.
Tax filers who do not itemize their deductions are eligible to claim an “above the line” or “universal” charitable deduction of up to $300 this year.
In 2017, the Tax Cuts and Jobs Act increased the standard deduction significantly ($24,800 for a couple in 2020), resulting in a much smaller pool of people who now itemize their taxes. A reduction in taxable income is available in 2020 for the 90% of donors who do not itemize their deductions. It is an “above-the-line” adjustment to income that will reduce a donor’s adjusted gross income (AGI) and thereby reduce taxable income. This adjustment is available for cash gifts to public charities (like UGAF) only and is limited to $300 per taxpayer (which has been clarified to explain that a married couple’s joint filing is capped at the $300 deduction). It is not available for gifts to Donor Advised Funds (DAFs) or Supporting Organizations (SOs), nor for cash deductions carried forward from prior years.
Deductions for corporate giving can now qualify for up to 25% of taxable income (normally limited to 10%).
The taxable income limit that applies to cash contributions made by corporations to public charities 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.
As always, we encourage you to reach out to your advisors, your CPAs, and your attorneys since each person’s situation will be different. But we also have a Gift and Estate Planning team who are willing to talk you through your options, whether that be gift types or areas of need. Feel free to contact Clint Travis, Senior Director of Gift and Estate Planning, and we’ll connect you with the right person for your question. There’s no cost, no obligation, and these conversations can be about all of your charitable interests, not just UGA. We would love to be an asset to you as you consider your philanthropy and all the good one person can accomplish.