Given the growing needs of charitable organizations during this global health crisis, 2020 may present compelling planning opportunities to make immediate gifts of cash at a time when they are sorely needed.
With the recently-enacted CARES Act, individuals may receive increased income tax benefits while helping charitable organizations. The CARES Act allows individuals who itemize their deductions to deduct cash gifts made to public charitable organizations in 2020 up to 100% of their federal adjusted gross income (AGI). The higher deduction limit applies to gifts for any charitable purpose, not just gifts related to the COVID-19 crisis. It covers gifts made directly to almost all public charities. However, gifts to donor-advised funds, supporting organizations, and private non-operating foundations do not qualify for the enhanced deduction limit under the CARES Act. The intent of the law is to get cash to public charities that they can use right away.
Here are some examples of how changes under the new law may be applied in 2020 to make high-impact, tax-efficient gifts:
Those who typically satisfy their annual gifts at annual fundraising events may provide much-needed support by making cash contributions in an amount equal to what they would have spent on tickets, auctions, or other fundraising opportunities since many of these events have already been cancelled for 2020.
Example: Susan donates a $300 check to a public charity on December 1, 2020. She does not itemize her deductions and she takes a standard deduction. Under the CARES Act, Susan can deduct up to $300 paid to public charities in 2020 in addition to the standard deduction. Without the special rule for 2020, there would be no deduction for an individual who takes a standard deduction and does not itemize.
Cash Gift Using Tax-Deferred Ira Dollars
Individuals who are between the ages of 59½ and 70 ½ years old and have an IRA that they intend to bequest to a charitable beneficiary can generate valuable tax and charitable benefits. Sort of a younger-person’s Qualified Charitable Distribution (QCD) for this year only, but at a time when non-profits need it the most. Individuals withdraw an amount equal to all or a portion of the anticipated bequest and contribute the proceeds to the charitable beneficiary in 2020. If you’re planning a large donation in 2020, this may be a smart strategy as long as you are between the ages of 59½ and 70½ and are not dependent on existing retirement funds.
Example: Jack, who is 60 years old, distributes $100,000 from his IRA on October 1, 2020, and writes a $100,000 check to a public charity on Dec. 1, 2020. His 2020 AGI is $400,000. Because the AGI limit for charitable gifts of cash is 100% in 2020, Jack deducts $100,000 from his $400,000 AGI at tax time. The fact that the cash gift is not a QCD made directly to the charity from his IRA, as well as that he is younger than 70½, does not disqualify him from effectively deducting a large gift indirectly made with IRA dollars. He will reduce future required minimum distributions from the IRA and, therefore, future tax liability.
Despite the waiver of required minimum distributions in 2020, an individual age 70½ and above can still make qualified charitable distributions up to $100,000 from their IRA. However, the cash contribution must be made directly from your IRA to the charitable organization.
To ensure sustainability, a number of non-profit organizations have established an endowment fund, which will provide support for resources, cover shortfalls and emergency provisions to better support our community needs.
Example: Karen donates $100,000 cash to a public charity on November 1, 2020, for a permanent endowment fund. She has 2020 AGI of $100,000 and can deduct the full $100,000 on her 2020 Form 1040. The fact that the gift is designated for a permanent endowment doesn’t change the tax result. Without the special CARES Act rules raising the limit for deducting cash gifts made to charities in 2020 to 100% of AGI, Karen would be restricted to 60% of her $100,000 AGI in 2020 or a deduction of $60,000.
Individuals who most benefit from the CARES Act rules for 2020 make large cash gifts while having little taxable income.
Charitable Gift Annuity
Individuals may consider starting a charitable gift annuity which is owned by the community foundation or charitable organization but pays a fixed income to the donor for life.
Example: John makes a $100,000 gift to a public charity on October 1, 2020, in exchange for a lifetime annuity worth $60,000 according to IRS valuation guidelines. John deducts $40,000 on his 2020 Form 1040. John’s AGI is $50,000. Without the rule change allowing the special election to increase the cash gift deduction to 100% of AGI, he would otherwise be limited to a deduction of 60% of his AGI, or $30,000.
Appreciated Stock Gift
While gifts of non-cash assets do not qualify for the enhanced deduction limit under the CARES Act, 2020 remains an opportune time for gifts of appreciated assets. A well-timed gift of such securities can provide much needed help to charity while offering an individual two valuable tax benefits – the avoidance of capital gains tax on the assets’ appreciation and a charitable income-tax deduction.
Example: Grant donates 100 shares of Apple (AAPL) on September 1, 2020 to a public charity. He receives the charitable income tax deduction of $13,200 based on the stock’s average price value on the date of the gift. Grant paid $5,000 for the stock and has avoided capital gains tax of 20% on the appreciation of the stock or $1,640.
As is the case in 2020, when rule changes are effective just for the remainder of a calendar year, there is often little procedural guidance from the IRS. So, we would always recommend reviewing tax and charitable giving strategies with your client centric team at Greenleaf Trust, including your CPA and attorney.
All disclosures aside, many families may have a unique and perhaps brief occasion in 2020 to meet important giving and wealth planning goals while at the same time helping community organizations that are in need of critical resources to fulfill their missions.
Disclosure: The information contained in this article is not intended as tax advice, and it is not a substitute for tax advice.