July 6, 2020

The CARES Act Incentivizes Charitable Giving

By Kyle Ferrara, Staff Accountant, Tax & Business Services

Tax Advisory Services

The CARES Act, which was passed in March 2020 to offer economic relief to small businesses during the COVID-19 crisis, also has created a unique opportunity for individual taxpayers to reduce their tax liability in 2020 by changing the tax treatment of charitable donations. The relevant new tax provisions include the following:

Raising the Charitable Giving Deduction Cap to 100% for individuals

The most significant charitable giving benefit of the CARES Act pertains to individuals who itemize their deductions. Prior to the passage of the CARES Act, the deduction cap for charitable contributions was 60% of adjusted gross income (AGI). For example, a taxpayer with $100,000 in AGI would be able to deduct up to $60,000 in gifts to charity. Under the CARES Act, the taxpayer may now deduct up to 100% of AGI for charitable gifts in 2020. There are creative ways individual taxpayers can leverage this temporary tax benefit to increase the size of their charitable donations:

Bundling

Bundling future donations in tax year 2020 will provide a greater tax deduction than spreading the donations over two or more years. For example, a taxpayer who plans to contribute $5,000 per year to a public charity over the next five years could instead consider gifting a lump sum of $25,000 this year. This will allow the taxpayer to provide a more substantial cash infusion to a favorite charity or charities, while realizing a more generous tax benefit.

Charitable Gift Annuities

Charitable Gift annuities are agreements under which the donor makes a lump-sum gift in exchange for the right to received fixed payments over a defined period of time. The donated funds are invested by the fund manager with the goal of growing the asset that will ultimately go to the charity beneficiary. The amount of the payments to the donor does not change, even if the investment declines in value. After the term of the annuity expires, the asset goes to the charity. The tax deduction the donor is entitled to take in the year of the gift is based on the amount the charity receives at the end of the term (which, hopefully, has appreciated over time). Charitable gift annuities may allow a larger charitable deduction than a direct gift, based on the expected future value of the investment, in addition to providing additional income to the donor over the term of the annuity.

Universal Deduction for Donations Up to $300

The vast majority of U.S. taxpayers do not itemize their deductions because the standard deduction of $12,400 for individuals and $24,800 for married-filing-jointly taxpayers is greater than their itemized deductions in aggregate. In opting for the standard deduction, taxpayers lose the ability to write-off gifts to charity. Yet the CARES Act provides a new benefit to these individuals for 2020, allowing for an above-the-line deduction of $300 for individuals or $600 for married-filing-jointly taxpayers even if they choose the standard deduction.

Summary

Because of the CARES Act, all taxpayers are eligible to claim additional deductions on their 2020 tax returns, and those who itemize have the unique opportunity to write-off charitable gifts up to 100% of their adjusted gross income. For additional advice on which charitable giving tax strategies are right for you, please contact your Marcum tax advisor.