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

3-Nov-20

End-of-Year Charitable Giving

Take-Away: Many options exist to make tax deductible charitable gifts before the end of this calendar year. A few options  have been expanded by the CARES Act, but for 2020 only.

Disclaimer: The topics in the following summary have been previously reported in my missives, so there is nothing really ‘new’ to report. Rather, this is just a short ‘refresher’ of the rules for charitable giving in 2020 and the corresponding income tax charitable deduction that will be available.

CARES Act: The CARES Act provides an enhanced ability to make charitable gifts for 2020. The changes that the Act created are:

  • Above-the-Line Charitable Gifts: An individual or a married couple can make a cash gift of up to $300 to most charities as a deductible gift that reduces their adjusted gross income. Unfortunately cash gifts to a donor advised fund and to a supporting charitable organization [IRC 509(a)(3)] will not qualify for this charitable ‘credit.’
  • Cash Gifts to Charities: Rather than face a charitable income tax deduction limit of 60% of the donor’s adjusted gross income, for 2020 only, the charitable deduction limit for cash gifts to charities is increased to 100% of the donor’s adjusted gross income. Again, a cash gift to a donor advised fund is limited to the 2019 limit of 60% of the donor’s reported adjusted gross income. Cash gifts to donor advised funds in excess of the 60% limit can be carried over for the next five years.
  • Cash Gifts by C Corporations: Rather than face a charitable deduction limit of 10% of the corporation’s reported adjusted gross income, for 2020 only, the charitable deduction limit for cash gifts to charities is increased to 25% of the corporation’s adjusted gross income.

Gifts to Public Charities: A gift of cash to a public charity is deductible up to 100% of the donor’s adjusted gross income. A gift of appreciated securities to a public charity is deductible up to 30% of the donor’s adjusted gross income, with any excess over the charitable deduction limit carried over for the next 5 years.

Examples Of Charitable Giving Options: A donor who is at the highest marginal federal income tax bracket of 37% intends to make a charitable gift of $10,000. What is the best asset to give to the charity from an actual cost to the donor perspective?

  • Gift of Cash: Assume a $10,000 cash gift to a public charity. The donor will receive a benefit from the charitable deduction of $3,700. The actual cost to the donor of the charitable gift of cash will be $6,300.
  • Gift of Appreciated Securities With Basis: Assume $10,000 in appreciated stock is gifted to a charity. The donor’s income tax basis in the appreciated stock is $5,000. The benefit of the gift of avoiding the tax associated with the embedded capital gain tax in the gift of stock is $1,190. The benefit of the income tax charitable deduction derived from the gift of stock is $3,700. The actual cost to the donor of the charitable gift of appreciated stock will be $5,100.
  • Gift of Appreciated Securities with No Basis: Assume $10,000 in appreciated stock is gift to a charity. The donor’s income tax basis in the appreciated stock is $0.00. The benefit of the gift of avoiding the tax associated with the embedded capital gain tax in the gift of stock is $2,380. The benefit of the income tax charitable deduction derived from the gift of stock is $3,700. The actual cost to the donor of the charitable gift of appreciated stock will be $3,920.
  • Gifts to Donor Advised Funds: The income tax deduction for cash gift to donor advised funds is still limited to 60% of the donor’s adjusted gross income. The income tax deduction for gifts of appreciated securities to a donor advised fund is limited to 30% of the donor’s adjusted gross income. The total income tax charitable deduction for cash only cannot exceed 60% of the donor’s adjusted gross income, and cash and other appreciated property given to the donor advised fund cannot exceeds 50% of the donor’s adjusted gross income.

Gifts to Private Foundations: The income tax deduction for a cash gift to a private foundation is 30% of the donor’s reported adjusted gross income. The income tax deduction for a gift of appreciated securities to a private foundation is limited to 20% of the donor’s reported adjusted gross income.

AGI Limit Example: A donor reports an adjusted gross income for 2020 of $250,000. The donor can gift cash of $100,000 to a charity, $75,000 of appreciated securities to a donor advised fund, and another gift of cash of $25,000 to the donor advised fund, and still stay within the various adjusted gross income limits for 2020.

End of Year Charitable Giving Strategies:

  • Bunch Charitable Gifts and Deductions: Due to the relatively high standard deduction that is available to donors, most individuals will not itemize their income tax deductions, including any charitable deductions. In order to gain the benefit of the charitable income tax deduction, charitable gifts will probably need to be bunched into a single calendar year, where the aggregate amount of the charitable gifts (and other tax deductions which have their own limits, like the SALT tax deduction limit $10,000) will exceed the standard deduction amount. A large, one-time gift to a donor advised fund can accomplish this objective, with charitable gifts from that fund in subsequent calendar years.
  • Give Appreciated Stock: As indicated by the earlier example, a gift of highly appreciated stock to a charity is the least costly to the donor with the largest tax benefit. Other gifts of appreciated assets might also accomplish this objective, but a charity has to be willing to accept other appreciated assets, e.g. real estate, before the charitable gift is completed.
  • Qualified Charitable Distribution: If the donor has a large IRA account and is over the age of 70 ½, he/she can transfer up to $100,000 from their IRA directly to a charity, as a qualified charitable distribution, or QCD. The donor will not receive a charitable income tax deduction, but the direct distribution to the charity will not be reported as part of the donor’s taxable income for the calendar year. Unfortunately, a gift of the IRA to a donor advised fund, or to a supporting charitable organization, will not qualify for this QCD opportunity.
  • Exploit the CARES Act 100% AGI Limit: If an IRA owner is not over the age 70 ½ and thus unable to avail themselves of the qualified charitable distribution opportunity, the donor can accomplish pretty much the same result with an IRA distribution. If the IRA owner is over the age 59 ½ and thus not subject to the early distribution penalty of 10%, the IRA owner can take a distribution of up to $100,000 from their IRA and gift that distribution to a charity (including a donor advised fund.) The $100,000 IRA distribution is reported as taxable to the IRA owner, but the IRA owner also is able to claim the $100,000 cash gift to the charity as a charitable income tax deduction, resulting in a ‘wash’ of the recognized income against the charitable income tax deduction.
  • Gift of Remainder Interest in Residence or Farm: The prevailing low interest rates used by the IRS to value retained interests can be exploited by a gift of a remainder interest in a personal residence or farm to a charity. [IRC 170(f)(3)(B)(i).] This gift of the remainder interest can generate a substantial charitable income tax deduction in the year in which the remainder interest in the real estate is given to the charity by a deed. The creation of a large charitable income tax deduction can be very helpful in a year in which the donor receives other one-time, taxable income, e.g. the year of a conversion of a traditional IRA to a Roth IRA.
  • Gifts to Charitable Remainder Annuity Trusts and Charitable Gift Annuities: While charitable remainder annuity trusts (CRATs) and charitable gift annuities (CGAs) are still  popular forms of charitable giving, the prevailing low interest rate environment make them less appealing from a tax efficiency perspective. With regard to the CGA, the charitable income tax deduction available to the donor will be less when the IRC 7520 rate is low, yet the amount of each annuity payment that is excluded from the donor’s taxable income will be higher under IRC 72. It is the same result for a CRAT, with additional complications arising from the tight qualifying rules associated with setting up a qualified CRAT.
  • Charitable Deductions to Offset Higher Reported Income: Due to the broad range in federal income tax brackets, a large charitable income tax deduction can bring the donor’s reported taxable income into lower marginal income tax bracket. For a married couple contemplating a charitable gift, they will find themselves at the 32% federal income tax bracket when their reported income is $326,000 or higher. If their reported taxable income feel below $326,000 by $1.00 due to a tax deductible gift, their reported income would be taxed at a federal income tax rate of 24%, or 8% lower.  If the married couple made charitable gifts, e.g. a QCD of $100,000 and a gift to a donor advised fund of $55,000, then their reported income would be taxed at the 22% federal income tax rate. The 22% federal income tax rate starts at $80,250. Thus, intentional charitable giving can reduce taxable income to a point where the donor is in a lower, sometimes much lower, federal income tax bracket.

Conclusion: No one can say for certain if the charitable giving opportunities under the CARES Act will be extended to future income tax years. Most people are betting on an increase in federal income tax rates in the next couple of years to help fund the current federal deficit. There are also a couple of Bills floating around Congress that would limit the amount of a charitable income tax deduction to 28% of the donor’s adjusted gross income. This may be the best year ever to make a charitable gift, not only because charities and the less fortunate in society desperately need donor support, but also because the rules in place make a income tax charitable deduction far more beneficial than in the past.