Several charities are experiencing a drop in donations as the United States grapples with the COVID health crisis. In response, Congress included a clause in the CARES Act, designed to provide relief to charities. Section 2204 of the CARES Act allows qualifying non-discriminatory individuals to deduct $300 from qualifying charitable contributions as an "above-the-line" deduction or adjustment to determine Adjusted Gross Income (AGI) fiscal years beginning in 2020.
Qualifying for the deduction
For fiscal years beginning in 2020, eligible individuals can deduct up to $300 in eligible charitable contributions made to qualifying charities. Any amount over the $300 limit cannot be carried forward to future years or claimed as an itemized deduction. Additionally, itemized deductions for charitable donations that appear in tax years beginning before 2020 cannot be claimed as an above the line deduction.
Eligible Individuals
A person eligible to claim the deduction is a person who chooses to itemize deductions for 2020. The deposit limit of $300 per unit applies regardless of the status of the deposit.
Qualified Charitable Contribution
An eligible charitable contribution must be made in "cash, check, electronic funds transfer, salary reduction, etc." Non-monetary real estate contributions are not allowed as an above the line deduction. However, these contributions are still available for those who itemize their deductions. No part of a donation made by a donor in the form of goods or services received constitutes a contribution for this purpose. For any cash contribution over $250, the taxpayer must keep a "simultaneous written confirmation" of the donation.
$300 Above-the-line Deduction
Standard deduction donors who donate $300 in cash ($600 for joint filers) to an eligible organization will receive an offline deduction in 2020. Since the deduction is not split, this is a direct rebate. The AGI and the full standard deduction remain available. If a donor itemizes deductions, savings above the line are not available; all charitable deductions are always reported in Schedule A.
A 100% Adjusted Gross Income Limit for Schedule A charitable deductions.
Traditionally, charitable donations were limited to an itemized deduction of 50% of adjusted gross income. This limit was raised to 60% in TCJA 2017. However, only for 2020, this limitation was completely removed. Cash donations are deductible up to 100% AGI by 2020. Theoretically, you can eliminate all AGI with charitable deductions and have no federal income tax. The heightened limit only affects cash donations and is limited to certain foundations and public charities; the 100% limit does not apply to Donor Advised Funds (DAF).
The 100% contribution limit is optional. A separate choice is available for each contribution. If no choice is made, the donation will be subject to the standard limit of 60%. Contributions greater than 100% of the AGI will be carried over for a maximum of five years, while other contributions from years before 2020 are limited to the limit set by the previous law (50% or 60%).
Planning Opportunities
While 2020 might be remembered as a terrible year for some, one of the strengths of the CARES Act is its unique opportunity to maximize the benefits of charitable giving. Planning possibilities abound in precise calculations and consultations with your tax professional.
The CARES Act suspends the minimum distributions required by many retirement accounts, allowing account holders to forgo receiving these mandatory distributions. Excluding someone from RMD may be eligible for lower tax payments for some taxpayers. For those who feel that dropping the RMD does not reduce the AGI enough to narrow the range, using the 100% AGI cap could further reduce income in lower tax brackets and lead to lower tax brackets additional tax savings.
Another planning opportunity to drop RMD is the Roth conversion. Combining a Roth conversion with a substantial 100% charitable contribution could offset some or all of the tax liability incurred for the conversion.
Again, the 100% limit only applies to cash donations to a public charity and certain foundations. The limit is not available for donations with value stocks. However, investors who have suffered losses due to recent market volatility may consider selling those losses to create money for a charitable donation, receiving the double benefit of reversing the loss and deducting the charitable deductions.
If you can make a meaningful contribution to a charity, this is the year to do it. With careful planning, in partnership with your tax professional, exclusive tax savings abound for 2020.
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