With the 2020 holiday season officially upon us and the new year rapidly approaching, we begin to reflect on a year of unprecedented events and far-reaching impacts of the COVID-19 Pandemic. Amid the prevalent uncertainty this year, a bright spot has been the generosity of those fortunate enough to make charitable contributions to organizations impacted by the pandemic. According to Schwab Charitable, during the first half of 2020 they saw a 46% increase in dollars granted and a 44% increase in the number of grants from their Donor Advised Funds to charities compared to 2019.1
Giving efforts are likely to ramp up further as year-end approaches, and while donating to charities may be an integral component of your core values, it can also be an important, strategic play in lowering your tax obligation.
This year, charitable contributions can count even more toward lowering tax bills for some. Thanks to the Coronavirus Aid Relief and Economic Security or CARES Act, which passed in late March 2020 amidst the coronavirus pandemic, your giving could stretch even further this tax season.
How Is This Year’s Charitable Contribution Exemption Different?
Thanks to the CARES Act, filers may be allowed to take a $300 above-the-line charitable giving deduction.2 This is significant because, typically, you would have to itemize deductions in order to deduct charitable donations from your taxes.
With changes introduced through the CARES Act, this above-the-line deduction can be used for those who choose to take the standard deduction which is $12,400 for single and married filing separately, and $24,800 for married filing jointly and $18,650 for head of households.3
Who Does This Change Benefit?
This CARES Act exemption is not available for those who itemize their deductions, it is only for those who are using the standard deduction on their 2020 tax returns. This is significant because, historically, anyone taking a standard deduction (approximately 90 percent of taxpayers according to the IRS) has not been able to reduce their adjusted gross income (AGI) by claiming charitable contributions.
What Donations Count Toward the CARES Act Deduction?
Just as any other charitable contribution deducted from your taxes, eligible donations must be made to qualified 501(c)(3) organizations or any other qualified organization as outlined in section 170(c) of the Internal Revenue Code.
What About Regular Charitable Contributions?
In the past, those who itemize their deductions were able to deduct up to 60 percent of their AGI in charitable contributions. Those who are extremely philanthropic may be interested to know that this limit has been raised to 100 percent.4 If you were so inclined, you could donate all of your income and deduct 100 percent of it - leaving you with a $0 tax bill.
Existing Charitable Strategies are Still Great Options
While the CARES Act provides options for those who may not typically have a tax incentive to make charitable donations, other charitable giving strategies remain effective.
Donating Highly Appreciated Securities Instead of Cash – With the strong performance of the stock market from the March lows, many investors have highly appreciated investment positions. These can be great tools to meet charitable desires as they allow the you to claim a deduction for the fair market value of the donated asset and eliminate the capital gains tax you’d otherwise incur if you sold the investment and donated the cash proceeds instead.
Qualified Charitable Donations from an IRA – Using IRA assets to make Qualified Charitable Distributions (QCD) is a viable strategy as well. Despite the CARES Act eliminating the need to take required minimum distributions in 2020, individuals age 70½ and older can still donate up to $100,000 tax-free from an IRA directly to a charity. By reducing the balance in the IRA, a QCD may also reduce taxable income in future years, reduce the size of a taxable estate, and limit the IRA beneficiaries' tax liability.
Coming Together for the Greater Good
It is great to see people supporting those in need and helping organizations important to them. This has never been more apparent than this year in response to a global pandemic. At the end of the day, charitable giving is a highly personal decision, and while tax incentives typically are not the only driver for making donations, 2020 is a year in which we all can continue to make an especially large difference for those most in need.
As always, your team here at Marquette is here to help. If you have any questions, comments, or would like to discuss things in more detail we are happy to do so.
This communication is not intended to be specific tax advice. Please consult your tax professionals for information regarding your individual situation.