CARES Act and Giving in 2020

The CARES Act provides incentives for giving more in 2020

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law in late March. The $2.2 trillion bill was designed to respond on many fronts to the COVID-19 crisis. It includes provisions related to charitable giving, although some of those provisions specifically exclude contributions to donor-advised funds. 

For those who itemize their deductions:  Donors who itemize their deductions can now give more to charity before reaching their adjusted gross income (AGI) limitation. Formerly set at 60%, the limitation for cash contributions to certain public charities has now been raised to 100% of an individual’s AGI for 2020. Any giving beyond this 100% limitation may be carried over and used in the next five years.

This means that in 2020, a taxpayer who deducts 30% of AGI in long term appreciated property gifts and elects the 100% of AGI limit for qualified cash contributions will be able to also deduct up to 70% of AGI for qualified cash gifts, for a total deduction of up to 100% of AGI. If this taxpayer uses all of his or her available deduction for qualified cash gifts, the taxpayer would pay no federal income tax in 2020! Ordinarily, the total deduction would be limited to 60% of AGI and the taxpayer would have to carry forward the rest. This change presents a planning opportunity for clients wanting to make major gifts and planned gifts in 2020. However, we have studied examples and include one below which demonstrates that it will not always be to a taxpayer’s advantage to make the 100% of the AGI election. As always, each particular donor should consult his or her tax advisor to determine whether a 100% election in 2020 makes sense for them.

Example:  A single donor who has taxable income of $200,000 and is in the 32% federal income tax bracket. If this donor makes $200,000 in qualified cash contributions, makes the 100% of AGI election, and itemizes no other deductions, donor will pay no federal income tax in 2020, saving $45,015.50 in tax as a result. However, if donor doesn’t make the election, donor would deduct $120,000 and carry forward $80,000 to 2021. Assuming he/she can deduct the remaining $80,000 in 2021 and again has taxable income of $200,000, donor will save $31,625 in federal income tax in 2020 and approximately another $22,136 in 2021, a total tax savings over the two years of $53,761. A donor in the highest federal tax bracket, 37%, could see an even larger tax benefit by not taking the 100% election.

NOTE: This provision excludes giving to private non-operating foundations and supporting organizations, along with any contributions made to establish or maintain donor-advised funds (DAFs).

IMPORTANT: This means that donors who exhaust the 60% limit with cash contributions to their DAFs in 2020 could make any additional donations outside their DAF and have those donations qualify for a deduction (up until reaching the 100% limit). Please consult a tax advisor to discuss your specific circumstances.

For businesses/corporations:  The CARES Act increases the maximum that corporations can donate to charity from 10% to 25% of their adjusted income. 

For more information, call the WTAMU Foundation at 806.651.2070