In addition to all the assistance offered to small businesses and nonprofits, the CARES Act also recognized the potential for individuals and businesses to step up to support nonprofit organizations during these trying times. As a result, the authors of the Act provided some new tax benefits to encourage donations.
As you may know, an individual that makes a contribution to a qualified nonprofit must itemize on the Schedule A of their Form 1040 to get a deduction. With the increase in the standard deduction under the latest tax act, there was concern that individual charitable contributions would decrease. The CARES Act should help for 2020 as taxpayers can take a deduction for up to $300 ($600 for a married couple filing jointly) in charitable contributions directly from their adjusted gross income (AGI) if they don’t itemize on their 2020 tax form. A donation to a donor advised fund (DAF) does not qualify for this new deduction.
For those donors that can afford to give in higher amounts, previously you could only deduct up to a maximum of 60% of your AGI. Now you can deduct 100% of your AGI for any cash gifts made to qualified nonprofits and not pay any taxes on your income. It may be important to note that if the donor gives more than their AGI in 2020, there is a carry forward allowed for up to 5 years for the excess, but the deduction will return to 60%. In addition, this deduction does not apply to contributions to private foundations or to DAFs.
Required Minimum Distributions (RMDs) generally are the minimum amounts that a retirement plan account owner must withdraw annually starting with the year that he or she reaches 72 (70½ if you reach 70 ½ before January 1, 2020). Under the CARES Act, the RMD that would have started in 2020 does not have to start until 2021, including distributions from defined benefit pension plans and 457 plans. This change dampens somewhat the incentive for a donor to make a qualified charitable distribution (QCD) from their IRA in 2020. Even so, making a QCD this year will still allow itemizers and non-itemizers to direct up to $100,000 from their IRA to charities in a tax-efficient manner.
For corporations, the CARES Act raised the annual cash gift limit from 10% to 25% of corporate taxable income. In the case of partnerships or corporations, each partner or shareholder must individually elect to receive the benefit of the increased charitable deduction on their taxes and as with individual giving, the tax benefit does not apply to contributions to DAFs.
In addition to cash donations, the CARES Act incentivizes food donations by raising the deduction from 15% to 25% of AGI for the 2020 taxable year. This deduction is available for individuals and businesses. So if you have $100,000 of taxable income, up to $25,000 worth of contributed food, your taxable income would be reduced to $75,000. As noted above, donate more than 25% of your AGI and you will be able to carry over the excess to the next year. However, it is likely the deduction will return to 15% of AGI.
Knowing everyone’s case is unique, the author suggests you consult with a tax advisor to develop a giving-strategy that works best for you.
By Tom Raffa, a Board Member of Park City Community Foundation and the National Leader of Raffa-Marcum’s Nonprofit and Social Sector Group.
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