Passed in late March, the federal government's COVID-19 relief package includes $2.3 trillion worth of provisions to help mitigate the economic impact of the pandemic. Known as the CARES Act, the package includes appropriations for small businesses, individual taxpayers, hospitals and a variety of other groups. A little-known section of the act also offers new tax advantages for charitable giving.
“At first, people were dealing with the immediacy of the act," says Bill Ringham, director of private wealth strategies at RBC Wealth Management-U.S. “Small business owners were applying for SBA loans, and people were deciding on whether to roll required minimum distributions back into their IRAs because they're no longer required. The charitable giving portion is a small provision of the act, but it's a hidden gem."
Because nonprofits now need funding more than ever, this section of the CARES Act is intended to encourage and incentivize more charitable giving. And for high-net-worth individuals (HNWIs) who take advantage of the temporary rule changes, 2020 could be a one-time opportunity to benefit from leaving a legacy gift or making a difference for an organization you're passionate about.
Tax implications for charitable giving
The new legislation allows tax deductions on two types of charitable gifts. First, it allows up to $300 given to a qualified charity to be claimed as an above-the-line deduction. After the Tax Cuts and Jobs Act, which went into effect in 2018, increased the standard deduction, many taxpayers had less incentive to donate to charities. Instead, they took the standard deduction and stopped itemizing.
Because the new $300 standard deduction is above the line, taxpayers can take the deduction without itemizing. They can donate up to $300, take the deduction above the line, and still take the standard deduction. “It's not a huge amount, but charities are in great need and would love a $300 contribution," Ringham says.
For taxpayers who will itemize deductions, the CARES Act effectively suspends the limit on deductions for cash contributions to public charities for 2020. Historically, deductions for cash contributions to public charities were limited to 50 percent of an individual taxpayer's adjusted gross income (AGI). The Tax Cuts and Jobs Act in 2018 increased that figure, allowing taxpayers to deduct charitable contributions of cash to public charities up to 60 percent of their AGI.
“The CARES Act temporarily allows you to deduct up to 100 percent of your AGI for certain qualifying contributions," Ringham says. “That allows individuals to completely wipe out their AGI, and their tax liability, with a charitable contribution."
How to qualify for new charitable giving tax changes
For HNWIs who have philanthropic or charitable goals as part of their wealth plan or legacy plan, the CARES Act makes 2020 the perfect year to accomplish those goals. “If you're a consistent supporter of a 501(c)3 organization and you have the ability to make a significant contribution, the CARES Act offers a good opportunity to fulfill that desire and deduct up to 100 percent of your adjusted income," Ringham says. “If you've always wanted to leave $1 million to the symphony, this is the year to do that."
For some high-net-worth taxpayers, if 2020 will not be a high-income year, a large charitable contribution could balance out their entire tax bill. “This is an opportunity to benefit charities immediately, without being limited to deducting only 60 percent of AGI," Ringham says.
Due to the pandemic, many professionals and business owners may experience a year of lower income in 2020, and as a result may not be as motivated to give, says Angie O'Leary, head of wealth planning at RBC Wealth Management-U.S. But for those who've been considering a Roth IRA conversion, combining a conversion with a charitable contribution could be advantageous.
Converting a traditional IRA to a Roth IRA triggers income tax liability on the contributions made to the traditional IRA. But by completing the conversion during 2020, and also making a sizable contribution to a charity you value, you may be able to mitigate some or all of that tax liability and help the charity at the same time. “If you combine charitable giving in conjunction with a Roth IRA conversion while benefiting from the 100 percent deduction, it's a triple win," O'Leary says.
To take advantage of the CARES Act changes, the charitable donations have to be in cash, not in a donor-advised fund or in stock, O'Leary explains. But individuals who've lost money in the market recently could sell some stock at a loss and donate the proceeds to charity, benefiting from a tax write-off on the loss as well as on the charitable gift.
Charitable giving for the whole family
Large legacy gifts aren't the only way to take advantage of the changes in the CARES Act. While the $300 above-the-line deduction may not benefit you, it could be an opportunity to help your children donate to a cause that's important to them.
“Many parents have young adult kids who may be impacted financially by this virus and may not be able to give to charity on their own," says O'Leary. “So it may be a good opportunity to give young adult children $300 they can donate to a charity they care about, and they can take that $300 above the line deduction. You can help instill that giving spirit for future generations."
Because a number of charitable organizations are publicizing information about their specific needs right now, donors can directly see the impact of their giving . O'Leary describes how she and her daughter donated to a domestic violence shelter, which is providing technology to the kids living at the shelter with their mothers so they can complete school work. “It's great to know the money you give is going specifically to that need," O'Leary says.