Charitable Contribution Considerations in the CARES Act

This article originally appeared in Aldrich Community, a client experience offering from Aldrich Wealth.

COVID-19. Coronavirus. Pandemic. Since March, our world has been consumed by these words, and our day-to-day lives altered by the social distancing measures put in place to help flatten the curve. We all felt the impact of shelter-in-place orders. Some have been impacted by the illness directly. Others have lost their jobs or seen a notable decline in income. Most of us have felt the pain of separation from friends and extended family.

While our current circumstances call for social distance, people have found new ways to connect and be present. We may not be able to shake our neighbors’ hands or dine in at a restaurant (depending on where you are), but our communities are placing even greater emphasis on connecting, designating time for video conference calls, virtual happy hours, and real quality time with members of our households. Beyond that, several of our clients have reached out seeking meaningful ways to assist struggling families and businesses, even as they face reduced income themselves. With the recent passage of significant legislation, the federal government equipped us with excellent means to achieve that end.

The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, became law in the last week of March. Some of the Act’s provisions are better advertised than others (here’s looking at you, stimulus checks), but there is one lesser-known provision on charitable contributions worth noting. This portion of the law is advantageous for those looking for smart ways to continue building community from afar through philanthropic action.

Each year, the federal government offers charitable income tax deductions for charitable contributions. The allowable deduction varies based on several criteria related to the donor, the gift, and the recipient. The CARES act made some critical changes to a few of these criteria.

New Deduction (For Taxpayers Who Claim the Standard Deduction)

• Historically, only filers that itemized deductions on their tax returns could receive a deduction for gifts to charity. For the large percentage of folks who took the standard deduction, no charitable deduction was available. With the implementation of the CARES Act, filers who take the standard deduction can now claim an above-the-line deduction of up to $300 for cash donations to a qualified charity for the tax year beginning in 2020.

New Charitable Deduction Limits (For Taxpayers Who Itemize Their Deductions)

• In the past, taxpayers itemizing their deductions could only deduct cash donations to qualified charities up to 60% of their AGI. The CARES Act has temporarily increased the deduction limit to 100% of AGI for 2020, effectively suspending that limit for cash donations. Any charitable donations exceeding the limits may still be carried forward, subject to certain limitations.

These changes incentivize all income tax filers, whether they itemize their deductions or not, to increase philanthropy at a time when many individuals cannot otherwise afford to give. This incentive is achieved by offering tax deductions to help offset the gift amount, which benefits you along with the donee. As with all tax laws, though, there are additional factors to consider.

The increased deduction does not include gifts to all recipients. Contributions must be to qualified charities, as listed by the IRS. Contributions to private foundations and donor-advised funds are not included in CARES Act changes, so individuals who typically gift through these vehicles may wish to consider gifting from personal accounts in 2020 to potentially take advantage of the increased deduction amount.

Stated deduction amounts do not apply to all types of gifts. Only gifts of cash are eligible. Gifts of other property, including real estate and appreciated stocks, are subject to more stringent limitations.

The changes may reduce the appeal of Qualified Charitable Distributions (QCD). The CARES Act waives required minimum distributions (RMDs) from IRAs for 2020. In light of this change, it may be prudent to use personal accounts to fund any cash gifts to charity this year. Typically, it’s advisable for taxpayers who have RMDs and are charitably inclined to make QCDs, which are distributions up to $100,000 directly from their IRA to a qualified charity. The rationale is that these charitable distributions are not taxable to the donor and reduce the remaining RMD, which is taxable at ordinary income rates. Since distributions are not required this year, individuals who gift from personal accounts can still receive top-of-the-line deductions while leaving IRA accounts intact, giving account balances time to recover from recent volatility associated with the pandemic.

Even if the gift meets all eligibility requirements, there is one more point to consider: motive. Your primary goal for giving should not be tax-driven. Whether you pay taxes on all earned income or reduce your tax liability via gift to charity, there is still a financial outlay involved, so if the cause doesn’t align with your ideals, it probably isn’t worthy of your hard-earned dollars.

As the world around us seems to be experiencing the same volatility that our assets do in the markets every day, it can be tempting to give fear a stronghold. As our investments teach us, though, significant upside can come from volatility for those of us who stay disciplined in long-term plans and keep focused on the things within our control. Luckily, enhanced tax savings for charitable gifts happens to be one of those things this year. As always, be sure to consult your tax and financial planning professional to find the strategy that aligns best with your goals.