The CARES Act provides donors “more bang for the buck” for donations made in 2020. Here’s how the CARES Act changed charitable contribution tax deductions in 2020:
Prior to the CARES Act, the law provided that individual taxpayers could deduct charitable contributions only if the taxpayer itemized personal deductions instead of taking the standard deduction. After the Tax Cuts and Jobs Act passed, less than 10% of taxpayers itemized deductions. This means that after the Tax Cuts and Jobs Act (TCJA) passed 90% of taxpayers lost the ability to deduct charitable contributions made by them. To mitigate the damage cause by the global pandemic and its impact on charitable giving, Congress passed the CARES Act that provides unique giving opportunities for 2020 (the CARES Act applies to federal income tax laws only):
1. New $300 Universal Charitable Deduction
Taxpayers who don’t itemize deductions (90% of all taxpayers) may now deduct up to $300 per year in charitable contributions. Such deductions must be in cash and donated to a 501(c)(3) public charity. Donations to nonoperating private foundations, support organizations, and donor advised funds don’t qualify for this deduction.
2. Removed Annual Limit on 2020 Charitable Deduction by Taxpayers who Itemize Deductions
Under the TCJA, taxpayers who itemize deductions may deduct charitable contributions up to 60% of their adjusted gross income. Any contributions over this amount must be carried forward and deducted in future years. For example, if your adjusted gross income is $100,000, under the TCJA, you could deduct up to $60,000 in charitable contributions. This means that if you donated $75,000 to charity in one year, you would need to carry forward the additional $15,000 donation and deduct it in the next tax year.
For 2020 only, the CARES Act permits taxpayers who itemize their deductions to donate up to 100% of their adjusted gross income and take the entire deduction in 2020! So, if your adjusted gross income in 2020 is $90,000, you may deduct up to $90,000 in charitable contributions and entirely eliminate your federal income tax liability for 2020. What if you don’t have as much income as you want to donate in 2020? This is the perfect opportunity to engage in a conversion of your traditional IRA to a Roth IRA and offset the income with the charitable deduction. This is a truly unique tax planning opportunity that expires on December 31, 2020.
3. Corporate Donations
Under the TCJA, a corporation may deduct up to 10% of taxable income for charitable donations. The CARES Act increased this amount to 25% of taxable income for 2020. Donations in excess of 25% may be carried forward and deducted over the next five years.
In summary, the CARES Act provides unique giving opportunities in 2020. Many savvy givers are accelerating gifts they would otherwise make in 2021 to 2020, to take advantage of these unique (expiring December 31, 2020) opportunities.