CARES Act: Charitable Giving Changes Due to COVID-19

COVID-19 has presented unique opportunities for charitable giving for the 2020 tax year, which has been addressed in the new Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Under the new guidelines, which apply to the 2020 tax year only, taxpayers can donate 100 percent of their adjusted gross income to charity and have it fully offset their taxable income.  Previously, this deduction was capped at 60 percent of adjusted gross income.

For example, a taxpayer has $100,000 of taxable income and wants to make a $100,000 donation to a qualified charity in 2020.  The taxpayer will have reduced their taxable income to zero and won’t owe any taxes on their income.  In prior years under the 60 percent rule, using the same income and charitable contribution amount, a taxpayer would have only been able to reduce their taxable income by $60,000.

What happens if you donate more than 100 percent of your adjusted gross income?

If a taxpayer wants to donate more than 100 percent of their adjusted gross income, they can do so without the fear of losing out on the deduction.  Any charitable contribution that exceeds their adjusted gross income can be carried forward for the next five years, but will be subject to the 60 percent AGI limit in subsequent years.

Consider this:  a taxpayer has $100,000 of taxable income and wants to make a $300,000 donation to a qualified charity in 2020.  Not only will their taxable income for the current tax year have been reduced to zero, but they will have a $200,000 charitable contribution carryforward available, subject to the 60 percent AGI limit, to offset their income for the next five years.

What happens if I don’t itemize my deductions?

To incentivize taxpayers to make contributions to qualified charitable organizations, Congress included a notable provision in the CARES Act that applies to taxpayers who claim the standard deduction, rather than itemizing their deductions, on their tax return. For the 2020 tax year, donors can take a deduction for up to $300 in charitable contributions even if they claim the standard deduction.

Other ways to harness the CARES Act charitable giving provision

If a taxpayer is in the position to make a sizeable charitable contribution, with the goal of fully offsetting their taxable income, this could be the perfect opportunity to consider other ways of increasing their adjusted gross income.  This can be accomplished by selling an asset that has significantly increased in value and will be subject to either ordinary income taxes or capital gains taxes, or they could initiate a Roth IRA conversion.  This can be an effective tax planning strategy for someone who is actively trying to reduce their tax burden through philanthropic means.