Charitable Contributions in 2020: How the CARES Act Affects You?

Charitably inclined individuals will find that their donations this year will gain additional tax benefits. The recently passed CARES Act established certain provisions to help maintain the similar level of charitable contributions that individuals would normally make. Here are the main points of this Act:

Federal tax deduction of up to 100% of Adjusted Gross Income (AGI) – While the 2017 TCJA Tax reform bill made itemizing less attractive, one could still itemize charitable deductions up to 60% of one’s AGI. The CARES act has temporarily done away with this limit. In theory, one could reduce 2020’s tax liability down to $0 through itemized charitable contributions. One should keep in mind that donations to donor advised funds will not qualify as a charitable contribution. To qualify for the 100% AGI deduction, donations must be made in cash directly to qualified charitable organizations.

$300 Above-the-Line Deduction – You will be able to claim a deduction of up to $300 for donations made to a charity. As with the previous point, donations must be made in cash directly to a qualified charitable organization. Donations to a donor advised fund will not qualify for this deduction. You should keep in mind that the standard deduction must be elected for this deduction and cannot be combined with the Itemized deduction of up to 100% of AGI.

Qualified Charitable Distributions from IRAs – While the rules for QCDs have not changed due to the CARES act, the RMD waiver for individuals age 72 or older may discourage individuals from making these types of distributions. RMD waivers aside, a QCD still allows individuals to make gifts to charity in a tax-efficient manner.

Charitable Contributions in NJ – While NJ does not provide a general charitable deduction on a state return level, there is a new proposal to provide a charitable contribution deduction for up to $10,000 for single filers ($20,000 for married filers) in order to address pandemic’s effect on the decreased levels of donations. If passed, this deduction would only be available during this COVID-19 emergency.

Conclusion

Ultimately, these new provisions have created some new planning opportunities for individuals. For example, if you intend to take advantage of this year’s 100% AGI charitable deduction, you could increase your AGI through Roth Conversions, thus maximizing how much you donate to charity and pay no Federal taxes on a Roth Conversion. While this is just one example of a potential wealth-building strategy, it is recommended that you consult with a tax advisor or financial advisor to understand how you can benefit from these changes.

Weingarten Associates is an independent, fee-only Registered Investment Advisor in Lawrenceville, New Jersey serving Princeton, NJ as well as the Greater Mercer County/Bucks County region. We make a difference in the lives of our clients by providing them with exceptional financial planning, investment management, and tax advice.