Giving Opportunities Extended Through 2021
The CARES Act (Coronavirus Aid, Relief, and Economic Security) of 2020 included provisions designed to encourage gifts to charity during the pandemic. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 extends those provisions through 2021.
For taxpayers who itemize on their income tax returns, the deduction limit for cash gifts to charity is normally 60% of adjusted gross income (AGI). Under the CARES Act, the limit was increased for 2020 cash gifts to 100% of AGI. This now applies to cash gifts made in 2021. The deduction limit for gifts of appreciated assets (e.g., stocks, bonds, mutual fund shares) remains at 30% of AGI. Any excess deductions may be carried over for up to five additional tax years.
The CARES Act included a new deduction of $300 for cash gifts to charity for taxpayers who don’t itemize. This has been extended for cash gifts made in 2021 and increased to $600 for joint filers. Gifts to donor advised funds do not qualify.
Charitable Opportunities Created by the CARES Act
Several tax changes included in the CARES (Coronavirus Aid, Relief, and Economic Security) Act, designed to provide relief to Americans, may also create opportunities to provide gifts to your favorite charity.
Among the provisions:
1. Many taxpayers will receive or have received checks from the IRS. These rebates, which are advance refunds of credits against 2020 income taxes, will be up to $1,200 for individuals and $2,400 for joint filers, with an additional $500 for each child. The full rebate begins phasing out for those with adjusted gross income in excess of $75,000 for single taxpayers, $112,500 for heads of households and $150,000 for married couples. The amount of the rebate is based on the taxpayer’s 2018 income tax return (unless the 2019 return has already been filed). For those who don’t need these funds to provide for family or other loved ones, these funds can be an unexpected source to make charitable gifts.
2. An above-the-line deduction of up to $300 is available for cash gifts to public charities, offering tax saving for taxpayers who don’t itemize. Consider this scenario: Kurt and Sally have four children, none of whom itemize their deductions. The couple could give each child $300 and ask each in return to write a check to a charity Kurt and Sally support. The children reduce their adjusted gross income—and income taxes—thanks to the above-the-line charitable deduction, while Kurt and Sally can give $1,500 to a favorite organization.
3. The usual limit on deductions for cash charitable gifts (up to 60% of AGI) are suspended for 2020, meaning taxpayers are allowed to claim unlimited deductions on their 2020 returns. The limit for gifts of appreciated property remains at 30% of adjusted gross income. Excess deductions can be carried over for up to five additional years.
4. For 2020, required minimum distributions (RMDs) from IRAs and other qualified retirement accounts are suspended. Normally, taxpayers must begin taking annual withdrawals from their IRAs after reaching age 70½, based on the value of the account as of December 30 of the prior year. (IRA owners who turn age 70½ in 2020 don’t have to begin RMDs until after reaching age 72). Because stock values have declined sharply over the first few months of 2020, RMDs would represent a larger share of the total account. IRA owners can, however, still make qualified charitable distributions (QCDs) of up to $100,000 annually from their accounts.
The greatest tax savings from QCDs occur when the gifts take the place of RMDs. With no distributions needed in 2020, tax savings may be lower. However, QCDs still may make sense for those who want to support us, particularly if you don’t itemize on your income taxes. Funds from IRAs represent dollars that never have and never will be subject to income tax.
As always, consult your advisor for information related to your specific situation. If we can be of assistance with the charitable aspects of your plans, please contact us.
The SECURE Act
The SECURE Act, passed in late 2019, includes provisions that may impact charitable giving.
1. IRA owners who turn 70½ in 2020 or later can wait until the year they turn age 72 to begin taking required minimum distributions. They may, however, begin making tax-free qualified charitable distributions from their traditional and Roth IRAs after reaching age 70½.
2. The “stretch IRA” is eliminated for most beneficiaries. Previously, a younger family member could be named beneficiary of an IRA and take distributions in smaller annual amounts, over his or her life expectancy. This allowed the IRA to continue growing tax sheltered and spread the income taxes owed on distributions over potentially many decades. With a few exceptions, the stretch IRA is now available only for surviving spouses. A non-spouse generally must distribute the entire IRA within ten years, which may result in higher income taxes.
Charitable opportunity: IRA owners may have all or a portion of their accounts pass to a charitable remainder unitrust that makes payments to younger family members. Not only do beneficiaries receive payments for life, similar to the stretch IRA, but when the trust ends, remaining assets pass to charity. If the IRA owner’s estate is subject to tax, an estate tax charitable deduction is available for the value of the remainder interest in the trust.
Provisions and Strategies for Charitable Giving in 2020
The Tax Cuts and Jobs Act of 2017 made several changes that affect charitable giving. Among these:
- The gift, estate and generation-skipping tax credits will shelter larger transfers (up to $11.58 million in 2020, adjusted for inflation).
- The deduction limit for cash gifts to charity is increased from 50% of AGI to 60%.
- The 80% charitable deduction allowed for payments for the right to purchase tickets to athletic events at colleges and universities is repealed.
Here are some charitable giving strategies to consider:
1. Qualified charitable distributions (QCDs) from IRAs are advantageous for eligible donors. Although no charitable deduction is available, the income tax that is normally owed on withdrawals is avoided. In addition, because QCDs can satisfy required minimum distributions, income tax savings can be realized. QCD rules:
- Donors must be at least age 70½ on the date of the gift.
- QCDs can come only from IRAs, not 401(k)s or other retirement accounts.
- A maximum of $100,000 may be given annually.
- The transfer must come directly from the IRA custodian.
- QCDs can be made only to public charities, not to private foundations or donor advised funds.
- Distributions can be used to satisfy a donor’s pledge.
2. Life-income gifts such as charitable remainder trusts and charitable gift annuities offer several advantages to satisfy philanthropic goals. Because deductions for remainder trusts and gift annuities tend to be larger, donors may be able to itemize in the year a gift is arranged. Payments from life-income gifts may be attractive to donors who would normally make bequests to charity through a will or living trust, providing income tax, and possibly capital gains tax, savings.
3. Making gifts of highly appreciated assets allows donors to avoid the capital gains tax that would be due if the assets were sold, offering tax savings even if the taxpayer uses the standard deduction.4. Those with donor advised funds can direct gifts to public charities. A donor may be able to itemize by making a larger gift to a donor advised fund, from which annual gifts can be made over several years. Contributing appreciated securities to a donor advised fund provides added tax savings.