As discussed in the Summer issue of "Seasonal Musings", which focused on recent legislation's impact on retirement planning, the Coronavirus Aid, Relief and Economic Security Act contains one-time provisions that apply to the taking of required minimum distributions (RMD's) in 2020. The CARES Act also makes temporary modifications to some of the tax rules surrounding this year's charitable giving. With just a couple of months left to take advantage of them, let's explore these changes and their implications:
1. For taxpayers who do not itemize deductions on their tax returns, there is now an "above-the-line" deduction for charitable donations made in the form of cash of up to $300 per taxpayer. In prior years, charitable giving only resulted in a smaller tax bill if the donor itemized deductions. To the extent that 2018's Tax Cuts and Jobs Act (TCJA) reduced the percentage of taxpayers who now itemize to around 10% or so, this section of the CARES Act dramatically increases the availability of charity-related tax benefits this year.
2. Taxpayers who still itemize deductions may now deduct cash donations of up to 100% of their adjusted gross incomes. In prior years, only cash donations of up to 60% of AGI could be deducted (with the remainder being available to carry forward to future tax years). It should be noted that the percentage limit on non-cash charity remains unchanged at 30%.
3. For the small business owners among you, corporations may now deduct up to 25% of charitable cash gifts, up from 10% previously.
Another by-product of recent legislation is that the ability to make qualified charitable distributions (QCD's) has been separated from the need to take RMD's. In 2020 for example, taxpayers age 70 1/2 and older may still make QCD's even though there is no need for them to take RMD's. And in future years (assuming no change to this part of the tax code), QCD's may begin at age 70 1/2 even though RMD's won't begin until age 72.
If tax-efficiency is a major consideration for the donor, then all of these changes may well necessitate a rethinking of charitable giving strategies in 2020 and in future years. For example, it may now make sense for IRA owners to forgo making a QCD this year, and to make two year's worth of them next year. Or for large donations, it may make sense for older workers and younger retirees to withdraw cash from a retirement plan account or IRA this year, and then donate it to charity (note that if this is done from an IRA account, this two-step process will not qualify as a QCD).
Recent events have been a perfect storm for charitable organizations. First, the TCJA reduced the tax benefits associated with charitable donations for a large number of taxpayers. Then the pandemic both increased the financial demands on many charities and caused the recession reducing the financial ability of many would-be donors to give. Using the provisions of the CARES Act wisely, we can help to fill this gap in a tax-efficient manner.
About the Author
Paul Winter, MBA, CFA, CFP® is a Fee-Only financial advisor and fiduciary in Salt Lake City, UT. His independent wealth management firm, Five Seasons Financial Planning, provides professional portfolio management and objective financial planning services to individuals and families, and to their related entities including trusts, estates, charitable organizations, and small businesses.