Many taxpayers assume that the greatly increased standard deduction instituted as part of the 2017 Tax Cuts and Jobs Act (TCJA) basically removed their ability to make charitable contributions and also get a tax deduction for it, since the higher standard deduction ($12,000 for single filers, $24,000 for couples) is more than most taxpayers’ itemized deductions. Of course, many taxpayers will continue making contributions to religious, charitable, and other nonprofit organizations, even in the absence of tax deductibility, simply because they represent causes the donors believe in. But with the passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in 2020, there are some important changes that could make more charitable contributions tax deductible for the 2020 tax year.
First, according to the IRS, taxpayers may make certain deductible charitable gifts even if they do not itemize—a departure from previous policy. According to IRS guidance, non-itemizing taxpayers can take a charitable deduction of up to $300 ($600 for couples) for contributions made in 2020 to qualified organizations, which the IRS defines as “religious, charitable, educational, scientific, or literary in purpose.” The IRS also provides a free online search tool that taxpayers can use to verify that an organization is qualified under IRS standards.
For those who itemize, the changes under the CARES Act include the ability to deduct gifts with much higher limits than previously. Individuals can deduct cash contributions to a public charity of up to 100% of their 2020 adjusted gross income (AGI), up from the previous limit of 60%. Corporations may deduct gifts of up to 25% of taxable income, up from the previous limit of 10%. It’s important to note that gifts to private foundations do not qualify for this treatment; the previous rules still apply. Also, both for those making itemized gifts and non-itemizing taxpayers described above, gifts to donor-advised funds (DAFs) do not qualify.
Because of the elimination of the required minimum distribution (RMD) from most retirement accounts for 2020, taxpayers who were accustomed to giving by means of a qualified charitable distribution (QCD) probably have less incentive to do so this year. However, those who elect to do so can still direct up to $100,000 from their IRA accounts to a charity of their choice.
In making these changes, the CARES Act acknowledges both the vital importance to our communities of public charities and charitable organizations and also the steep challenges faced by individuals and communities during the coronavirus pandemic. By providing increased limits and incentives to support these organizations, the CARES Act aims to offer relief to those who need it most during this difficult time.
If you have questions about charitable giving or if you are a family steward who is wondering how a larger philanthropic strategy might fight into your estate plan, I would be happy to provide guidance and support. Please contact Empyrion Wealth Management to set up a consultation.
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