The Coronavirus Aid, Relief, and Economic Security (CARES) Act includes two changes to the rules for charitable income tax deductions for individuals with an aim to increase philanthropy throughout the country. The Act:
- Increases the Adjusted Gross Income (AGI) Limitation for 2020 for Cash Gifts
- Initiates a $300 Above-the-Line Charitable Income Deduction
Change to the AGI Limitation for 2020 for Cash Gifts
The CARES Act increases the maximum 60% of AGI charitable contribution limit to 100% of AGI limit for 2020. This change is for the 2020 tax year only.
This means that you can get a charitable contribution deduction for the full amount of your AGI. Charitable contributions more than this amount can be carried forward for five years subject to the 60% of AGI limit in those years.
The higher 100% of AGI limit is only applicable for cash contributions made directly to charitable organizations, not to contributions to donor advised funds, supporting organizations or private foundations.
The reason for this is to encourage an immediate impact in the fight against COVID-19. Congress wants this additional allowable charitable contribution to be spent right away, rather than be accumulated for charitable purposes in future years.
It should be noted that taxpayers must elect to use the provision. If they do not, then their contribution would convert to a 60% limitation contribution which would be carried forward for five years instead of being used in 2020 without providing any tax benefit. Your tax professional can ensure that your election is properly recorded.
Want to Donate More than 100% of Your AGI?
If an individual is interested in making an even larger donation, they can convert their existing IRA (or other qualified retirement plan) to a Roth IRA. This will increase the income available for the 100% of AGI restriction and allow them to take an even larger 2020 charitable deduction. Moreover, if the amount of the gift is equal the value of the IRA funds converted, the donor may pay no federal income tax on the Roth IRA conversion.
How would this work?
Tom has $500,000 of AGI for 2020 and would like to make a $1 million charitable donation in 2020. In 2018 and 2019, his income tax deduction would be limited to $300,000 (i.e., 60%).
However, in 2020 only, the CARES Act allows him a charitable contribution deduction of $500,000. Still, this would normally leave a $500,000 charitable contributions carryforward (subject to the 60% of AGI limit) in the next five years.
But, if Tom has an IRA with more than $500,000, he would be able to convert $500,000 of the IRA to a Roth IRA giving him a full deduction for the $1 million donation and remove the income tax on future earnings of the investments by converting to the Roth IRA. Moving the $500,000 out of the traditional IRA has tax implications, so be sure to review your plans with your accountant before taking definitive action.
$300 Above-the-Line Charitable Income Deduction
THE CARES Act implements an additional permanent “above-the-line” deduction for charitable gifts made in cash of up to $300. Starting with your 2020 taxes, if you do not itemize your deductions, you can claim this new deduction.
While not specifically mentioned in the CARES Act, it is a logical assumption that each spouse of a married couple will be able to each claim a separate $300 deduction (for a total of $600).
The deduction is restricted to contributions of cash and does not include donations to a supporting organization, a donor advised fund, or non-operating private foundations. It also does not include any carryovers of excess charitable contributions from previous years. This provision is a permanent change.
RINA Wealth Management Services is doing all it can during this extraordinary time to be in constant communication with our clients and partners. RWMS works in close cooperation with the tax professionals at RINA Accountants & Advisors If you would like to discuss your 2020 contribution or any other financial issue, we want you to know that we are here to help you navigate this crisis and achieve your financial goals.