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

21-Dec-20

End-of-Year Charitable Giving

Take-Away: Late last month the IRS answered a question many had with regard to the amount of charitable deductions an individual can claim in 2020 if that individual makes gifts of both appreciated assets and cash in light of the CARES Act’s increase in the amount of cash that can be deducted for 2020. The good news is that the IRS adopted an interpretation of the CARES Act that permits stacking of cash and non-cash gifts to charity, but only in 2020.

Background: The limit for noncash contributions to charities is generally 50% of the donor’s adjusted gross income (AGI.) Gifts of appreciated assets are generally subject to lower charitable deduction limits. Long-term capital gain property given to public charities are normally limited to 30% of the donor’s AGI, while contributions to private foundations are generally limited to 20% of the donor’s AGI.

2017 Tax Act: The 2017 Tax Act increased the charitable deductions made in cash from 50% to 60% of an individual’s adjusted gross income (AGI.) This is a temporary rule change which is set to drop back to 50% beginning in 2026. The rule change only applies if charitable donations, in an amount equal to 60% of the donor’s AGI, are made in cash. However, this increase in the amount of deductible cash gifts to charity does not permit stacking. Therefore, if a donor were to make noncash charitable donations equal to 50% of the donor’s AGI, and then the donor makes an additional charitable donation of cash equal to 10% of the donor’s AGI, the donor’s charitable deduction would remain at 50% of his or her AGI.

  • Stacking: Stacking means that the 2017 Tax Act only allows an individual to receive a full charitable income tax deduction equal 60% of their AGI only if their charitable contributions are made only in cash, and not, for example, a full deduction equal to 60% of the AGI if the individual’s aggregate donations consisted of a contribution of appreciated long-term capital gain property equal to 30% of their AGI and the remaining contributions are made in cash  equal to 30% of their AGI.

CARES Act: This Act increased the limitation for cash contributions made to public charities from the 2017 Tax Act’s 60% of the donor’s AGI to 100% of the donor’s AGI. [CARES Act, Section 2205(a).]  The CARES Act seemed to also remove the 2017 Tax Act’s anti-stacking drawback by allowing a donor, for their 2020 income tax return only, to stack their charitable contributions made in cash on top of their non-cash charitable contributions (which are subject to the 50% of AGI deduction limitation [IRC 170(b)(1)(A) and receive a full income tax deduction equal to 100% of the donor’s AGI. However, the CARES Act excepts from the 100% cash contribution charitable deduction opportunity cash gifts that are made to either supporting organizations or donor advised funds.

IRS’ Interpretation: In the IRS’s draft instructions to the 2020 Form 1040, issued on November 25, 2020, it confirmed that the CARES Act allows for stacking of charitable gifts despite the anti-stacking language of the 2017 Tax Act. In short, cash gifts can be stacked on top of the other percentage limitations in 2020. In particular, this will benefit those donors who have unused charitable contribution carryovers from prior tax years into 2020. Moreover, this stacking interpretation will allow very generous individuals to zero-out their taxable income for 2020.

  • Example:  Don can contribute appreciated long-term capital gain property to his church for an income tax deduction. That charitable deduction available to Don will be worth up to the normal percentage of Don’s gross income limitation on deductibility, the fair market value of the appreciated assets, not to exceed 50% of Don’s AGI. Now Don can also make additional tax deductible cash gifts to his church where the combined value of Don’s cumulative donations to his church do not exceed 100% of Don’s AGI for 2020.
  • Example: Allison has $1.0 million of AGI for 2020. Allison also paid $10,000 in real estate taxes in 2020. Allison also has $80,000 in interest expenses for the year. If Allison wishes to zero-out her income tax liability for 2020, her targeted charitable giving for the year will be $910,000. [$1.0 million reported AGI less: (i) $10,000 in her SALT deduction, plus (ii) $80,000 in deductible interest she paid = $910,000.] To accomplish her charitable giving goals for 2020, Allison could make the following gifts: (1) a gift of $300,000 in appreciated marketable securities to Allison’s donor advised fund; (2) a gift of another $200,000 in cash to Allison’s donor advised fund; and (3) a ‘top-up’ in Allison’s charitable giving for 2020 with a cash gift of $410,000 to a charity of her choice, but not to a supporting organization nor to her donor advised fund.
  • Example: If, instead, Allison had $500,000 in unused charitable gift deductions that were carried over from her prior years of charitable giving, those prior year charitable deductions could be used by Allison in 2020, and Allison could still gift an additional $410,000 in cash to her favorite charities. Allison could give even more, more than her total reported AGI for the year, but the excess contributed over Allison’s AGI would then be carried over to later tax years and used as a charitable deduction in those later years.

Conclusion: At a time when charities are suffering, along with the millions of Americans that they serve, the IRS’s interpretation of the CARES Act’s increase in the amount of cash that can be gifted to charities and deducted in 2020 is both timely and welcome news. For those donors who can afford to give to charities, and who can afford to give a lot, an additional incentive will be the ability to deduct their large charitable contributions in 2020 up to 100% of their AGI for the year.