Charitable Giving During a Pandemic – Part 2
In this series, we continue to explore recent changes to the giving environment since the Tax Cut and Jobs Act of 2017 (TCJA) and now in the context of COVID and the related Coronavirus Aid, Relief, Economic Security Act (CARES).
In the last post, we reviewed recent updates to the tax code that have changed the landscape of how Americans view charitable planning. Here, we will explore new opportunities and strategies for giving within this context and during a time of great need. Take a few minutes to review these strategies and speak with a Certified Financial Planner professional and your tax advisor about how they might apply to your individual planned giving strategy.
What tax benefits are available for charitable donations?
In some ways, you can have your cake and eat it too. The new tax legislation has separated the charitably inclined donors from those motivated to give primarily due to tax incentives (that no longer exist). Still, there are several strategies that will help those charitably inclined to reap some tax benefit, while also supporting their favorite charitable causes.
In these strangest of times, if you are among the fortunate who still have disposable income available for donations, the following are a few simple giving strategies that should be accessible to many. These strategies will benefit those who have a charitable intent but may not qualify for tax deductions using the same old tricks.
Tax filers with deductions that approximate the standard deduction—whether just below, above, or at the deduction amount—might consider “deduction lumping” across tax years. In other words, give a lump sum of several years’ donations in a single year.
Lumping multiple years of charitable deductions in the same calendar year may help some filers reduce their taxable income in a given year. In the example above, the couple might consider lumping at least three years of charitable deductions in a single year.
You might also consider pairing this charitable planning strategy with donations to a donor-advised fund or a qualified charitable remainder trust.
Donor-advised funds have become increasingly popular vehicles to facilitate “deduction lumping.” If you have an annual gifting budget of around $5,000 per year, and you contribute 10 years of contributions to a donor-advised fund, you could theoretically deduct the entire $50,000 gift in a single tax year (assuming you report sufficient income to do so). However, you could make several “grants” from your donor-advised fund to several different organizations over a number of years.
Gifting of Appreciated Stock
Gifts of appreciated stock are still eligible to be deducted post-TCJA. These gifts typically allow a donor to give even more to a charity due to the elimination of the capital gains tax.
Additionally, you might consider giving appreciated stock to a donor-advised fund for even more effect (limited to 30% of AGI).
Qualified Charitable Distributions
Those with Required Minimum Distributions may make “Qualified Charitable Distributions” from their IRAs, eliminating the need to tally your itemized deductions. This strategy is quite appealing for those above age 72 years (70.5 for anyone already taking RMDs) since it allows those who file using the standard deduction to satisfy requirements for annual distributions while also excluding the distribution from income.
Note that qualified charitable distributions may not be made into a donor-advised fund.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act
There are several provisions of the CARES Act that also impact the charitable giving landscape. Following is a summary of relevant items that may help you support your most cherished organizations and causes this year.
Special Deduction for Tax Filers who take Standard Deduction
For those who are philanthropically minded, the CARES Act makes it easier to make charitable contributions. Even if a taxpayer does not itemize deductions, the CARES Act allows for a special above-the-line deduction of up to $300 for cash contributions made to nonprofits in 2020.
In other words, you may lower your AGI by up to $300 by making donations this year, perhaps making it an opportune time to help others who may be in a more tenuous financial position because of the pandemic.
Higher Limits for Cash Contributions
For those itemizing their deductions, the CARES Act allows donors to deduct up to 100% of their AGI for cash contributions made directly to nonprofit organizations. Typically, these contributions are limited to 60 percent of a taxpayer’s AGI. Additionally, taxpayers may carry forward qualified donations above their AGI for up to five years. (Note that this additional permission may not be used for contributions to donor advised funds or private foundations.)
Corporate Giving Incentive
The AGI limit for cash contributions was also increased for corporate donors. Corporations may deduct up to 25 percent of taxable income (increased from 10 percent).
Minimum Distributions Waived, but QCDs still Permitted
Even though RMDs are waived in 2020, you are still permitted to make a Qualified Charitable Distribution (QCDs) from your retirement account.
As with any tax planning strategy, we encourage you to speak with a Certified Financial Planner professional and your tax advisor about your individual tax filing situation and gifting objectives prior to initiating any of the strategies mentioned in this article. Many organizations and the individuals and families they serve will benefit from your generosity in this most uncertain time.
About the Author
Jane DeLashmutt O’Mara, CFP® brings more than a decade of experience working in financial services to her practice. Jane believes that client education and compassion are vital to the financial planning process. Whether she’s working with a client to plan for retirement or navigate a major milestone such as marriage, divorce, or loss of a loved one, she enjoys educating and empowering her clients. Jane also enjoys working with families with unique or complex estate planning needs. Contact her by calling 410-822-0813 or email firstname.lastname@example.org.