Updates for Donors: CARES ACT
The Coronavirus Aid, Relief, and Economic Security (CARES) Act creates two new tax benefits for donors to non-profits. One will mostly benefit low- and middle-income households. The other mostly will benefit a relative handful of high-income givers and may accelerate their donations to non-profits. Here’s what you need to know:
- The first change will make a $300 deduction for charitable gifts available to the 90% of taxpayers who do not itemized deductions on their federal income tax returns. The current tax code (2017 Tax Cuts and Jobs Act) raised the standard deduction, essentially giving many low- and middle-income earners the tax benefits of charitable giving, without the actual giving. This $300 deduction for 2020 is reason for all donors to make sure they gift $300 this year.
- The second change has the ability to impact large donors. Before 1/1/2018, donors could only deduct gifts representing 50% of their adjusted gross income in the given year. As of the 2017 Tax Cuts and Jobs Act, that increased to 60%. The CARES Act eliminates that cap for 2020 and for only 2020. A donor can fully deduct gifts equal to 100% of their adjusted-gross income. If you consider that the top tax brackets are at 35% and 37%, donating additional dollars could potentially save one tens of thousands of dollars in taxes this year.
Other Important Notes for Donors:
There are other tax benefits to gifting, not related to one’s adjusted gross income limitations that remain part of financial planning in 2020.
- Gifting directly from a qualified retirement plan continues to be a good idea for those forced to take Requirement Minimal Distributions (RMD). *Note: these distributions were suspended for 2020, meaning you do not have to make a withdrawal if you do not want to. But moving forward, you could consider using your (RMD)to gift directly to a charity, which is called a qualified charitable donation (QCD). Why make a gift in this way? Any distribution you take, forced or not, requires income taxes to be paid. Executing a QCD avoids that income tax. So even if you do not/cannot itemize your deductions, you’re avoiding taxes that would otherwise be owed – another form of tax savings.
- Gifting shares of appreciated securities may provide a donor with another form of tax savings. When you sell an appreciated security, capital gains taxes may be owed on the appreciated portion of the investment. If you instead gift shares of the security directly to the charity, you still may not be able to deduct the gift based on the increased standard deduction, but you would be able to avoid having to pay the gains tax, and so would the tax-exempt charity. While gains tax rates are historical not as high as income tax rates, this is still another form of tax savings that donors should consider when assessing “what” to gift and “how much” to gift.
- “Lumping” or “stacking” donations may be something to consider as well. If you have a giving plan that outlines planned gifts over a period of years, such as a pledge or an annual scholarship, then you might consider talking to those administrators about having you “pay it forward” this year in order to cross certain deductible thresholds. For example, a $10,000 gift may not be enough for you to itemize deductions for additional tax savings. But forward funding 5-years at $50,000 certainly would be. Not only could this be of great help to the organization during a difficult year, but you may finally reap the tax rewards of a lump sum donation, where the smaller annual gifts did not.
The content provided herein is based on our interpretation of the CARES Act and is not intended to be legal advice or provide a tax opinion. This blog post is a summary only and not meant to represent all provisions within the CARES Act.
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