Changes to Charitable Contributions

The CARES Act was signed into law on March 27, 2020 and has already become infamous for rollout issues. However, there are two changes to charitable contribution rules to incentivize donating in 2020. This year is the most tax-effective charitable contributions have been since the Tax Cuts and Jobs Act was put in place.

The first provision is a universal tax break that allows for a $300 above-the-line deduction. This is a straight dollar for dollar deduction for cash contributions to a qualified church or charitable organization. The law specifically excludes contributions to Donor Advised Funds. The benefit is available even if electing the standard deduction in 2020. Contributions from earlier in 2020 can be applied as well. Above-the-line deductions reduce Adjusted Gross Income (AGI) instead of taxable income. The magnitude of the tax benefit for individuals is small, ranging from $30 to $111 depending on the tax bracket. However, it can be extremely powerful for charities struggling in 2020. The bill says this provision applies to tax years beginning in 2020, so it may continue in future years.

The second provision will apply to significantly fewer people but for a much larger benefit. For individuals, the 50% AGI limitation for contributions is suspended for 2020. These “50% organizations” include churches, educational organizations, and contributions to Donor Advised Funds. In 2020, the limitation is lifted and your charitable deduction for noncash contributions is limited to 100% of AGI. Like before, any unused deduction can be carried forward.

The suspension of the 50% AGI limitation for individuals is a great opportunity to front-load charitable funding if 2020 is a high-income year. The limitation is also lifted for excess contributions carried forward from prior years. The corporate AGI limitations for charitable contributions are increased from 10% to 25% as well.

The CARES act put a lot of new programs into play, and the charitable contribution changes provide nice benefits for supporting struggling charitable organizations. There are new ways to reduce tax liability with both above and below-the-line deductions. The 2020 tax year could be a great time to fund a donor-advised fund or charitable endeavor. Deductions from charitable contributions also make room for additional strategies like Roth conversions.

To further discuss charitable giving and tax planning for 2020, please reach out to Sebold Capital for more information.