The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on Friday, March 27. The bill includes several provisions with implications for philanthropic organizations. Highlighted below is a summary of key changes that apply for the 2020 tax year. Please note these only apply for contributions to public charities. Contributions made to donor advised funds (DAF) or supporting organization do not apply.
New Charitable Deduction Limits: As part of the bill, individuals and corporations that itemize can deduct much greater amounts of their contributions. Individuals can elect to deduct donations up to 100% of their 2020 AGI (up from 60% previously). Corporations may deduct up to 25% of taxable income, up from the previous limit of 10%. The new deduction is for gifts that go to a public charity, such as DMSF. The old deduction rules apply to gifts to private foundations. The higher deduction does not apply to donations directly to a DAF.
Non-itemizers can take a charitable deduction: The adjustment is only available for cash gifts to qualified public charities in 2020 and is limited to $300 per taxpayer ($600 for a married couple) in annual charitable contributions. It is an “above the line” adjustment to income that will reduce a donor’s adjusted gross income (AGI), and thereby reduce taxable income. This is particularly beneficial to people who take the standard deduction when filing their taxes (in other words for taxpayers who do not itemize their deductions).
Required Minimum Distributions (RMD) Waived: In 2020, there will be no mandatory distributions from retirement accounts such as IRA, 401(k), 403(b) or other defined contribution plans, regardless of the age of the account owner. RMD for individuals over age 70 ½ are suspended until 2021. This includes distributions from defined benefit pension plans and 457 plans. The RMD is an attractive way for donors to make a significant charitable gift directly from their IRA to a charity through a qualified charitable contribution (QCD) while avoiding taxable income. The suspension of the RMD may dampen somewhat the incentive for a donor who makes a gift from their IRA to count toward that minimum. However, the tax benefit of the QCD remains.
Donors directing a QCD to charity this year (up to $100,000 per individual) will still reduce their taxable IRA balance. This allows all taxpayers, itemizers and non-itemizers alike, to direct gifts from their IRA to charities in a tax efficient manner.
If your assets are substantial enough that you can give more than your income this year, you won’t lose the deduction for the excess amount. You can use it next year, as has always been the case.
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This information is not intended as legal or tax advice. For such advice, please consult an attorney or tax advisor. Figures cited in any examples are for illustrative purposes only. References to tax rates include federal taxes only and are subject to change. State law may further impact your individual results.