Many investors are charitably inclined and would likely contribute to charitable causes with or without any tax incentives. That said, if they can get a tax break for their contributions, so much the better. For 2020 there are a number of charitable giving options financial advisers can consider as they work with clients on planning for the rest of the year.
While not a huge tax break, the CARES Act authorized an above-the-line charitable deduction of up to $300 for charitable contributions. The tax law changes enacted for the 2018 tax year increased the standard deduction, limiting the number of taxpayers who can itemize deductions each year.
The $300 above-the-line deduction means that all taxpayers, regardless of whether or not they can itemize deductions, can deduct up to $300 in charitable donations. This is not a huge break, but it is something.
100% of AGI Deduction
The CARES Act temporarily suspended the limits on charitable contributions. The normal limitations are 50%, 30% or 20% of a taxpayer payer’s adjusted gross income (AGI), depending upon how the IRS classifies the organization receiving the donation. This, of course, only applies to taxpayers who can itemize deductions.
For 2020, under the new CARES Act rules, taxpayers can deduct charitable contributions up to 100% of their AGI.
This can be an important planning tool for your clients. For example, if your client wants to make a large charitable donation in 2020 due to a financial windfall they can do this and potentially reap a higher tax benefit than in a normal year.
They might consider bunching several years’ worth of donations to one or more charitable organizations into a single year in order to take advantage of this higher deduction threshold. While bunching donations can be a good strategy in any tax year, doing this in 2020 offers a potentially larger deduction than in normal years.
For clients for whom a Roth conversion makes sense this year, they can potentially increase their charitable contributions to a level at which the charitable donation would offset all or most of the additional taxes created by the Roth conversion.
This rule change only applies to cash gifts made directly to the organization. Contributions to a donor advised fund or a private foundation don’t count toward this higher deduction ceiling.
For wealthy clients who might be in a position to make a donation in excess of 100% of their AGI, their 2020 charitable deduction will be limited to a maximum of 100% of their AGI. As in the past, they will be able to carry an excess contribution amount over to future years. The ability to use these carry-overs will be limited by their ability to itemize deductions in any subsequent tax year.
Qualified Charitable Deductions
Qualified Charitable deductions, or QCDs, are designed for IRA account holders who want to take a portion of their required minimum distributions (RMDs) and contribute some or all of it to charity. The annual limit on QCDs is $100,000.
The SECURE Act enacted at the end of 2019 raised the age to start RMDs for those who had not reached age 70½ by Jan. 1, 2020 to 72. However, the new rules did not change the minimum age for QCDs, so that remains at 70½. This means that IRA account holder clients who are at least 70½ can still use the QCD method to make charitable contributions.
Even with the waiver of the RMD requirement for 2020 under the CARES Act, clients who are eligible might consider using the QCD for their charitable contributions. While there is no charitable deduction for making a charitable contribution using the QCD, the IRA distribution used to make the contribution is not subject to taxes.
The QCD may be useful for some clients in 2020 even with the RMD waiver in place. An example would be a client who doesn’t need their RMDs to meet their retirement spending needs and who would prefer not to pay taxes on these distributions. By using the QCD in 2020 they can reduce the amount in their IRA that will be subject to RMDs in future years.
When possible, using the rules in place for 2020 can make these deductions more tax-efficient.