Charitable Giving Opportunities are Expanded under the CARES Act
As our world struggles to face the health, humanitarian, and economic challenges of the COVID-19 pandemic, our communities are desperately in need, and for those in a position to help, never was there a better time to do so. The CARES Act provides several income tax benefits for charitable contributions made in 2020.
First, individual taxpayers not itemizing deductions on their 2020 federal income tax return may take an above-the-line deduction (an adjustment used to arrive at Adjusted Gross Income) up to $300 for cash donations to 501(c)(3) nonprofit organizations. Please note that donations to organizations other than public charities – such as private foundations and supporting organizations and Donor Advised Funds — do NOT qualify for this deduction.
Also, for taxpayers itemizing their 2020 deductions the CARES Act suspends the percentage limitation on how much of a cash charitable contribution may be deducted on an individual taxpayer’s 2020 federal tax return. For contributions originating in 2020, a taxpayer may elect to deduct an amount up to 100% of the taxpayer’s Adjusted Gross Income (AGI), effectively reducing taxable income to zero. Similar to the above-the-line deduction, only cash contributions to public charities are eligible for this favorable treatment.
To the extent a taxpayer’s contributions in 2020 exceed 100% of their AGI, that excess will carry forward to the following year for up to five additional tax years. Carryover contributions from years before 2020 will continue to be limited in accordance with prior law.
BNN Observation: Taxpayers with prior year charitable contribution carryforwards for which 2020 is the fifth and final year of the carryforward period need to be aware that the carryforward amount will be lost if the taxpayer takes advantage of the 100% limitation for 2020 contributions.
For taxpayers that are C corporations the percentage limitation is increased from 10% to 25%. All other rules discussed above – cash gifts, completed in 2020, to public charities, impact on prior year carryforward amounts – likewise apply.
For C corporations and other businesses that donate food inventory to charity, the percentage limitation is increased from 15% to 25%.
BNN Observation: The magnitude of these changes for the 2020 tax year are indicative of the critical need in our communities. Taxpayers have been provided an opportunity to make significant charitable impact and also open up financial and tax favorable opportunities for themselves.
Combining a significant charitable contribution, with low market values, may provide a favorable environment for recognizing income such as converting a Traditional IRA to a Roth.
Additionally, depressed market values afford an opportunity to harvest losses in taxable accounts to offset gains from earlier on in the year, or potential gains later in the year if markets recover. While it is often a good idea to donate appreciated securities to avoid capital gains and obtain a charitable contribution, the opposite strategy is true with investments that have depreciated in value. Investments with unrealized losses should be sold in order to recognize that loss prior to donating the cash proceeds. (Watch out for the wash sale rules if also picking up substantially similar positions within 30 days.) This would provide the Taxpayer with a “cash” donation that is eligible for the 100% AGI deduction. We encourage you to speak with your BNN tax advisor before undertaking any such strategies.
For more information, please contact your BNN tax advisor at 800.244.7444.
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Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, investment, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.