2020 is one of those challenging times when charitable giving is greatly needed.
Thankfully, the IRS provides potential tax benefits for those who help others through generosity and giving. And in 2020, Congress temporarily increased certain charitable tax deductions via the CARES Act (Coronavirus Aid, Relief and Economic Security Act – passed into law on March 27, 2020). The CARES Act opens new opportunities to help generous donors increase their charitable impact during this pivotal time.
We’ve provided an overview of the changes in the 2020 CARES Act that are relevant to charitable giving, as well as a few points to consider when developing a charitable giving strategy for 2020. Individuals should consult their tax and financial professionals to understand how these tax changes and strategies may affect their specific situations and circumstances.
The CARES Act’s Tax Changes for Charitable Giving
There are a few important details that apply to the tax benefit which the CARES Act provides for charitable giving:
- To qualify, your gift must be a cash contribution. Donations of appreciated stock, property or other assets do not qualify for the changes in the 2020 CARES Act.
- The gift must be made in 2020 to a 501(c)3 public charity.
- Contributions to Donor Advised Funds (DAF), supporting organizations, certain private foundations and conservation easements do not qualify.
The CARES Act of 2020 made two primary changes to tax deductions for charitable giving. The first applies to taxpayers who take the standard deduction while the second applies to taxpayers who itemize deductions.
For Taxpayers Who Claim the Standard Deduction: New $300 Tax Deduction
For taxpayers who take the standard deduction, the CARES Act adds a new “above-the-line” deduction for up to $300 in qualified charitable giving. To qualify, the charitable contribution must be made in cash in 2020 and given directly to a qualified 501(c)3 public charity.
Since this new deduction is “above the line,” it benefits taxpayers who use the standard deduction. Before 2020, taxpayers who claimed the standard deduction did not receive a direct tax benefit from their charitable giving. It’s also important to note that taxpayers who itemize deductions do not qualify for this deduction.
For Taxpayers Who Itemize Deductions: Temporary Change in Charitable Deduction Limit
For taxpayers who itemize deductions, the CARES Act temporarily increases the deduction limit for cash donations made directly to qualified public charities. The Act allows taxpayers to deduct up to 100% of their 2020 adjusted gross income (AGI) when making cash donations. (The previous deduction limit for cash gifting was 60% of AGI.)
Taxpayers who itemize deductions must elect whether to apply the 100% of AGI limit to each qualified cash contribution. If this election isn’t made, the contribution would revert to the 60% of AGI deduction limit. Consult your tax professional for more details on this requirement.
While very few people have the ability and desire to charitably give this amount of their income, this change allows taxpayers to potentially offset their entire 2020 tax liability via charitable giving.
Considerations for Charitable Giving Strategies for 2020
There are several things donors should consider when developing a charitable giving strategy for 2020. Donors should consult their tax and financial professionals to develop a strategy that considers their unique situations and circumstances. Additionally, there are rules, elections and restrictions that must be considered for each individual or family before implementing certain charitable strategies.
Type of Assets
One consideration is the type of assets the donor has available for charitable contribution. The changes in the CARES Act only apply to cash giving that is made directly to qualified public charities. Therefore, the existing deduction limits for other asset types (such as appreciated stock or securities) still apply and did not change for 2020.
Another consideration for donors involves tax planning. To maximize your total tax deduction, it’s important to consider what your expected income tax bracket is for 2020 in comparison to your expected tax brackets over the next several years.
- If 2020 is a high income year: Some taxpayers may find themselves in an unusually high income tax year, perhaps from the sale of a business or some other taxable income event. This increase in income will likely drive them into higher tax brackets, making this a great year to maximize tax deductions. Therefore, taxpayers in this situation should seek strategies that maximize deductions in 2020 instead of delaying charitable deductions into future years.
- If 2020 is a low income year: Other taxpayers may find themselves with abnormally low taxable income in 2020 due to the economic fallout or other favorable tax changes related to COVID-19. Despite having unusually low income, these taxpayers may still have the desire and the financial resources to give generously this year. These taxpayers may receive a larger overall deduction by gifting assets that delay a portion of the charitable deduction into future years, rather than receiving the entire deduction in 2020. This increases the overall tax benefit by claiming the tax deduction in future years that have larger taxable income (and a higher tax bracket).
We’re Here to Help with Your Charitable Giving Strategy
At Warren Averett Asset Management, we are fortunate to work with many philanthropically minded individuals and families. While each family’s charitable goals are different and unique, our primary objective is to understand what is most important to each family and help develop a plan to maximize their impact on the world around them.
You should not assume that any information provided serves as the receipt of, or as a substitute for, personalized investment advice, legal advice or accounting advice from Warren Averett. This information should be used as a reference only. Talk to your Warren Averett advisor, or a professional advisor of your choosing, for guidance specific to your situation. A copy of Warren Averett’s current written disclosure brochure discussing our advisory services and fees is available upon request.