Editor: Marcy Lantz, CPA
As clients look for last-minute tax-saving strategies in 2020, one area that should be considered involves the changes to the charitable giving rules made by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136. Even taxpayers who do not itemize can benefit in 2020 from a charitable deduction.
Section 2204 of the CARES Act allows for an above-the-line deduction of up to $300 per taxpayer for a cash donation to a public charity (other than a donor-advised fund or supporting organization under Sec. 509(a)(3)). The $300 limit applies to the tax-filing unit, so for those who file married filing jointly, the maximum above-the-line deduction is $300.
For those who are over age 70½, qualified charitable distributions from an IRA of up to $100,000 are still allowable in 2020. Even though required minimum distributions from IRAs were suspended for 2020, an eligible individual may make direct charitable donations from his or her IRA in 2020, and the direct charitable distribution of up to a maximum of $100,000 will not be included in income (the charitable donation will not be deductible). This rule applies regardless of whether the taxpayer itemizes. Though there is not a direct income tax savings in 2020 for making qualified charitable distributions, reducing the value of the IRA through charitable gifting may be a benefit to an overall estate plan for those with taxable estates who are also charitably minded.
For those who itemize, the potential benefits of charitable giving are even greater. Under the law known as the Tax Cuts and Jobs Act, P.L. 115-97, the rule that limits the charitable deduction to 50% of the donor's charitable contribution base increased to 60% for tax years beginning after Dec. 31, 2017, and before Jan. 1, 2026 (for cash contributions to public charities and private operating foundations). For 2020 only, this limit has been raised to 100% under Section 2205 of the CARES Act for qualified contributions (cash donations to a public charity that is not a donor-advised fund or a supporting organization that the taxpayer elects to treat as qualified contributions).
While the percentage limit has been temporarily increased to 100% for qualified contributions, taxpayers can make the qualified contribution election separately for each contribution and thus do not have to elect to treat all of their charitable contributions that would otherwise qualify as qualified contributions if they would not receive a tax benefit from doing so. For example, assume that a taxpayer has adjusted gross income (AGI) of $150,000 in 2020 and has itemized deductions of $10,000 of state taxes and $20,000 of deductible mortgage interest and makes cash charitable donations of $10,000 each to 15 qualified charities in 2020. The taxpayer's charitable contribution base (i.e., AGI without regard to any net operating loss carryback) is $150,000.
If the taxpayer elects to treat only three of the 2020 charitable contributions as eligible contributions for the 100% limit in 2020, the remaining $120,000 will be subject to the 60% limitation of $150,000 × 60% = $90,000. Her taxable income will be $150,000 - $10,000 (state taxes) - $20,000 (mortgage interest) — $90,000 (60% charitable limit) — $30,000 (100% charitable limit) = $0, and she will have a $30,000 charitable contribution carryover to 2021 that will be subject to the 60% limitation in 2021. The election allows the taxpayer to limit the 2020 charitable deduction to an amount less than 100% of the charitable contribution base so that taxable income does not become negative due to nonbusiness itemized deductions.
Additionally, there is a unique opportunity this year for clients with charitable contribution carryforwards to 2020. Under Sec. 170, current-year contributions are used first in determining the amount of the charitable deduction allowed in any given year. However, in 2020 under Section 2205 of the CARES Act, qualified contributions are disregarded for purposes of the limitation in Sec. 170(b), which applies to current-year percentage limitations, and the limitation in Sec. 170(d), which applies to carryovers of excess contributions from prior years.
Assume a taxpayer in 2020 has AGI of $150,000, a carryover of $75,000 of 50% limitation charitable contributions from 2017, deductible state taxes of $10,000, and mortgage interest of $30,000. The taxpayer makes a $35,000 cash charitable contribution to a qualified charity and makes the election to apply Section 2205 of the CARES Act to the $35,000 contribution. Since the 2020 charitable contribution limit is 50% of $150,000 = $75,000 for the contribution carryover from 2017 and the qualified charitable donation in 2020 is not considered for Sec. 170(b), the total itemized deductions will be $10,000 + $30,000 + $75,000 + $35,000 = $150,000, resulting in zero taxable income. Since Section 2205 of the CARES Act only applies to cash contributions, any property contributions in 2020 will be used first before any 30% or 20% property contribution carryovers from prior years. However, 30% and 20% charitable contribution carryovers will also benefit from the 2020 cash contributions not being counted toward the charitable contribution base limitations.
In this season of giving, taxpayers who are feeling generous have multiple ways to make donations to charities and receive extra tax benefits in 2020, so practitioners should make sure they include these ideas in last-minute tax-saving strategies that they provide to clients.
Marcy Lantz, CPA, CSEP, is a partner with Aldrich Group in Lake Oswego, Ore. Ms. Lantz would like to thank the following practitioners for their help editing the December Tax Clinic: Michael T. Odom, CPA, CVA, partner at Fouts & Morgan CPAs PC in Memphis, Tenn.; Carolyn Quill, CPA, J.D., LL.M., principal at Thompson Greenspon CPAs & Advisors in Fairfax, Va.; Kristine Boerboom, CPA, CMA, MBA, partner at Wegner CPAs in Madison, Wis.; and Todd Miller, CPA, partner at Maxwell Locke & Ritter in Austin, Texas.
For additional information about these items, contact Ms. Lantz at 503-620-4489 or firstname.lastname@example.org.
Contributors are members of or associated with CPAmerica, Inc.