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George F. Bearup, J.D. Senior Legal Trust Advisor

10-Oct-20

End of Year Charitable Giving

Take-Away: The CARES Act gave taxpayers new opportunities for charitable giving for 2020, while the SECURE Act arguably curtailed a popular form of charitable giving. As individuals start thinking about their end-of-year charitable giving for the 2020 income taxes, these ‘new’ rules will need to be factored into their philanthropy.

Background: We are now in the fourth quarter of 2020. For most of us, this calendar year cannot end soon enough! As many begin to think about, and plan to the extent that they can, their income tax liability for 2020, it is important to consider a few recent changes made to the charitable giving rules. These rules have been covered in the past, so consider this a refresher on those charitable giving changes.

SECURE Act: The SECURE Act curtailed (to a limited degree) the use of qualified charitable distributions (QCDs) from an IRA. An individual, over age 70 ½, can direct that up to $100,000 be distributed from his/her IRA to a public charity (but not a donor advised fund or private foundation) each year. Such a distribution satisfies the donor’s required minimum distribution (RMD) for the calendar year, if over the age 72, although there are no RMD’s for 2020. While this direct transfer from the IRA is not deductible, neither is it included in the donor’s reported income for the year. Accordingly, the QCD lowers the donor’s gross income level, which may be beneficial since gross income determines qualifications for a number of state or governmental benefits, not to mention an individual’s Medicare premium amount.

  • Limitation: The SECURE Act placed a limit on the amount of the donor’s QCD if he/she also makes a deductible contribution to a traditional IRA. Recall that the SECURE Act repealed the prohibition on an individual over the age 70 years contributing to an IRA. As such, an individual with earned income may still contribute to an IRA, while in the same year directing QCD’s from his/her traditional IRA. The limitation is the reduction of the ‘non-reported’ in income QCD dollar-for-dollar. This reduction  in the ‘non-reported’ income QCD is by the aggregate amount of the post age 70 ½ deductible IRA contributions. In short, a deductible IRA contribution in 2020 will also reduce the opportunity to make non-reported in income QCD’s from an IRA in 2020. Note, this limitation applies to any IRA, such that contributions may be made to #1 IRA, while the QCD’s are made from #2 IRA; nonetheless, the QCD from the #2 IRA will be curtailed by the deductible contribution to the #1 IRA.

CARES Act:  Two key changes were made by the CARES Act, but both are limited for use only in 2020.

  • $300 Cash Contribution: Most taxpayers no longer itemize their income tax deductions due to the larger standard deduction amounts and the $10,000 limit on state and local taxes paid. The CARES Act permits an individual taxpayer to claim a $300.00 charitable deduction for cash gifts to public charities in addition to claiming the standard deduction. Contributions to private foundations and donor advised funds are excluded from this $300 gift opportunity. Accordingly, a married couple could deduct, between them on their jointly filed tax return, $600 in cash gifts to public charities, and still claim the standard deduction of $24,000+.
  • Increased Charitable Contribution Limits for Cash Gifts: In other years, gifts of cash by an individual to charities were limited to 60% of the donor’s adjusted gross income (AGI) for the year. Excess charitable contributions above that financial ceiling could then be carried over and used during the next 5 calendar years. For 2020 only, the CARES Act dropped the 60% limitation for cash gifts to charities. Accordingly, an individual can make a deductible cash gift to certain charities up to 100% of their adjust gross income for the year, thus avoiding taxes on that income for the year. Note: this opportunity is limited to cash gifts and not appreciated assets. Individuals who make non-cash gifts to charities remain subject to the existing contribution limits of the donor’s AGI. This change is obviously intended to encourage philanthropic donors to increase their giving in 2020.
  • Election: The use of this increase in the contribution limit for cash gifts to charities is made with the taxpayer’s election. If the donor expects to report income at higher marginal rates in future years, he/she might decline to make this election and instead use the existing contribution limit (60% of AGI) to carry forward at least a portion of the charitable deduction to use against future reported taxable income. The IRS has yet to provide any guidance on how to make, or not make, the required election.
  • CARES v QCD: The ability to make a deductible cash gift to charity of up to 100% of the donor’s AGI for 2020 arguably impedes the tax effectiveness of a QCD. A couple of reasons follow:
  • Suspended RMD’s: The repeal for 2020 of RMD’s by the CARES Act reduces the value of the QCD since there is now an option for not taking any RMD in 2020. Retirement account owners manage the amount of income from their retirement accounts, since the amount of income impacts their qualification for, or the cost , of a number of state and federal benefits, e.g. Medicare premiums, including the 3.8% net investment income tax. QCD’s keep a taxpayer’s reported income low. Now, there is the option for keeping their income low simply by not taking an RMD for 2020.
  • QCD Alternative: The QCD provides an effective charitable income tax deduction for a donor over the age 70 ½ since the income associated with the QCD is not included in the donor’s income for the year. In contrast, if the donor takes a taxable distribution from their IRA (increasing their reported income) and turns around and gifts that cash distribution from the IRA to charity, the entire cash gift is deductible for 2020.  Again, this reduces the potential advantage of the QCD. In addition, while the QCD is limited to $100,000 per donor, there is no limit on the distribution from the gift of an IRA distribution to charity alternative. In short, for 2020, a donor has the ability to make unlimited gifts from IRAs to charities with no adverse federal income tax consequence. Note: For donors who do not itemize deductions, they will not receive any tax benefit from taking an IRA distribution and gifting that distribution to charity. For donor’s who do itemize, the question of whether the  income tax charitable deduction will be fully available may be more complicated for some taxpayers.
  • Qualified Disaster Payments: The federal declaration of a national emergency for the COVID-19 pandemic triggered rules under the Victims of Terrorism Tax Relief Act of 2001. That allows charities, including private foundations, to make qualified disaster payments to individuals under grant-making standards that are relaxed from the normal requirements. If the rules are followed, these  payments  from charities will generally not be taxable income to the recipient, and the usual excise tax issues like, self-dealing applicable to the charity, will not be violated.

Conclusion: Let’s hope that millions of taxpayers will take advantage of these charitable giving rules to help those in urgent need who have suffered serious setbacks (health, financial, emotional) from the COVID-19 pandemic. Our job is to guide them by alerting them to these new charitable giving rules that are available only for 2020.