Breaking Down the Charitable Provisions of the CARES Act

No sooner had we absorbed the major legislative changes of the SECURE Act than we were suddenly hit with a global pandemic turning our everyday lives upside down.

In response to the COVID-19 crisis, on March 27, the President signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a $2 trillion emergency stimulus package. The CARES Act provides financial assistance and economic relief to individuals and businesses through a variety of means including direct “recovery rebate” payments, forgivable loans, an expansion of unemployment benefits, and other temporary changes to the tax code.

Gift planners are likely aware of the changes made that directly impact charitable giving. This article will highlight those changes and examine different applications of the various new rules.

New $300 “Above-the-Line” Charitable Contribution Deduction

The CARES Act adds a new type of qualified charitable contribution that can be taken as an “above-the-line” deduction on a tax return. Above-the-line refers to credits and deductions that are subtracted from gross income to arrive at adjusted gross income (AGI), as opposed to below-the-line that are deductions from AGI — primarily, itemized deductions — to arrive at taxable income. Above-the-line deductions are generally preferable, since many other parts of a tax return are pegged to AGI (like how much Social Security income is taxable, for example). If you can reduce AGI, your overall tax picture is likely going to improve.

But don’t go celebrating just yet. This new above-the-line deduction is limited to just $300. For those in the highest federal marginal rate of 37%, this only saves $111 in taxes.

Also, this new deduction can only be taken by those who do not already itemize deductions. If you itemize, you take your charitable deductions on Schedule A, as usual. However, more taxpayers are now precluded from itemizing deductions thanks to the Tax Cuts and Jobs Act (TCJA) of 2017, which doubled the standard deduction and capped state and local tax deductions to $10,000. Thus, although limited to $300, there are likely many taxpayers who will be able to take advantage of this new deduction.

This deduction is only available for gifts of cash and can only be taken for gifts made to 170(b)(1)(A) public charities. Gifts to donor-advised funds (DAFs) or 509(a)(3) supporting organizations do not qualify. The deduction also applies only once per “tax unit” – meaning, only one $300 deduction is allowed per tax return, whether that return is filed by someone single or by a married couple.

One last note on this deduction: It appears that this is now a permanent part of the code. Most of the changes under the CARES Act are temporary, but the statutory language states that the $300 above-the-line deduction is available “in the case of taxable years beginning in 2020” with no sunset date mentioned.

Suspension of Required Minimum Distributions (RMDs)

The CARES Act suspends the required minimum distributions (RMDs) that would otherwise have been taken in 2020. For those who would otherwise have an RMD requirement in 2020 — anyone who had already turned 70.5 in 2019 (but not those who turn 70.5 in 2020[1]) — those taxpayers can wait until 2021 to take their RMD.

Side note: When taking your first RMD, you can opt to delay taking that first RMD until no later than April 1 of the following year, while also having to take the second RMD in the same calendar year. For those who delayed their first RMD in 2019, with the anticipation of taking two distributions in 2020, neither of those RMDs need to be taken, thanks to the CARES Act! Thus, a lucky few get to escape two RMDs this year.

What about taxpayers who have already taken their RMD early in 2020, prior to the passage of the CARES Act? Under Notice 2020-23, the IRS provided some guidance. Taxpayers who took their RMDs between February 1 and May 15 can roll back the unwanted RMD to an IRA by July 15, 2020. This is an extension of the 60-day rollover rule, which allows a taxpayer to roll an IRA distribution back into an IRA within 60 days, provided no such 60-day rollover has happened within the prior 365 days. Normally this rule does not apply to required distributions, but since there are now no required distributions in 2020, the rule can be applied, and Notice 2020-23 extends the 60-day period to July 15.

Under the CARES Act, RMDs cannot be rolled back if the distribution was taken from an inherited IRA, and under Notice 2020-23 cannot be rolled back if the RMD was taken in the month of January, although some commentators expect the IRS to issue additional guidance. Stay tuned.

The reason this is of importance to gift planners is, of course, the impact on qualified charitable distributions (QCD). As a refresher, taxpayers over 70.5 can make direct charitable contributions from an IRA to a public charity up to $100,000 per year. That IRA distribution is not included as taxable income for that year and the contribution counts toward the IRA owner’s RMD for that year.

So, what happens if there is no RMD? So long as the taxpayer otherwise qualifies to make a QCD, he or she can still do so, and the distribution will not be included as taxable income. The QCD simply will not count toward any RMD since there is no RMD for 2020. This is the same issue faced by those who are between ages 70.5 and 72; those who fall under that age range also qualify to make QCDs but do not have RMDs.

This is where a CPA and wealth advisor can help counsel taxpayers on the best strategy given their situation. Does it make more sense to make the QCD anyway, thereby lowering the size of the IRA and potentially reducing the size of future RMDs? Or is the taxpayer better off making a gift of cash in 2020 (see the next section) from a non-IRA source and then go back to making QCDs in 2021? Or perhaps a gift of cash coupled with a Roth conversion in 2020?

Temporary Repeal of AGI Limit for Gifts of Cash

Perhaps the most impactful of the changes made by the CARES Act is the temporary repeal of the maximum 60%-of-AGI limit for charitable gifts of cash. Under the new law, for 2020 only, taxpayers can deduct up to 100% of their AGI with “qualified charitable contributions.” Theoretically, someone can eliminate their entire 2020 tax liability with charitable gifts!

There are requirements for a contribution to be consider “qualified.” First, only gifts of cash qualify. Second, the gift must be made to a 170(b)(1)(A) public charity — no DAFs or supporting organizations. Finally, the gift must be made during calendar year 2020.

The taxpayer must elect the 100%-of-AGI treatment. Of course, taxpayers must be able to itemize deductions in order to take advantage of this.

Again, tax and financial advice from trusted counsel will be critical in helping the donor make the best decision given the totality of his or her situation. Let’s look at some possible scenarios.

Scenario 1.

Single donor has AGI (before any other deductions) of $200,000 in 2020. He is in the 32% federal marginal bracket. If he makes qualified charitable contributions of cash totaling $200,000 and elects the 100%-of-AGI treatment, he pays zero federal tax in 2020, saving $45,015 in taxes.

Scenario 2.

Same donor as Scenario 1, except the donor does not elect the 100%-of-AGI treatment. Without the election, he is limited to a deduction of 60% of AGI, or $120,000, bringing taxable income to $80,000 in 2020, which is in the 22% federal bracket. Tax savings in 2020 = $31,625.

Our donor carries forward the unused charitable contribution of $80,000 to 2021. Assuming he again has AGI of $200,000 in 2021 and assuming no other itemized deductions, he lowers his taxable income to $120,000, which is in the 24% federal bracket. Tax savings in 2021 = $22,135.

Total tax savings over two years = $53,760, versus the Scenario 1 savings of $45,015.

As you can see, the 100%-of-AGI may seem like a no-brainer, but each taxpayer must evaluate his or her situation to come up with the best decision.

Also, from a realistic standpoint, given the deteriorating economic environment resulting from mandatory business closures and stay-at-home orders, not to mention the stock market decline of February-March, how many donors will have the wherewithal to donate 100% of their AGI in cash gifts this year?

Another point for gift planners to remember is that the pre-CARES Act 60%-of-AGI limit assumes that all gifts made in the taxable year are cash gifts. If gifts of non-cash assets like appreciated securities are made in the same year, or a gift is made to a private foundation, the 60% limit drops to 50% of AGI[2]. This would not seem to matter under the CARES Act unless someone elects not to take the 100% of AGI limit on their gifts of cash and makes non-cash gifts in 2020. In that case, the old rules would apply and the 60% limit on the cash gift is reduced to 50%.

What happens if a donor makes a gift to a public charity and to a donor-advised fund in 2020, both in cash? The gift to the donor-advised fund would qualify for the 60% limit under pre-CARES Act rules (assuming no non-cash gifts were also made in 2020), while the gift to the public charity qualifies for the 100% limit.

Scenario 3.

Donor has AGI of $100,000 in 2020 and makes cash gifts of $80,000 to a public charity, $20,000 to a donor-advised fund, and no other non-cash gifts. The donor can fully deduct the $80,000 public charity gift as a qualified charitable contribution in 2020 subject to the 100%-of-AGI limit. The gift to the donor-advised fund would be subject to the 60% of AGI limit and cannot be deducted in 2020, as the donor has already exceeded 60% of AGI in deductions. The gift to the donor-advised fund would be a carry-forward deduction in 2021.

Russell James, JD, PhD, CFP?, professor of charitable financial planning at Texas Tech, published an article on LinkedIn[3] in which he explains that the 100%-of-AGI limitation could be applied with respect to charitable gift annuities (CGA), but not charitable remainder trusts (CRT). This stands to reason, as a CGA gift is made directly to a public charity; thus, the charitable deduction portion of the donation would be eligible for the 100% limitation. However, a CRT is not a public charity and would thus not meet the definition of a qualified charitable contribution under the CARES Act, not to mention that cash is usually not the best asset to use when funding a CRT.

Scenario 4.

Donor makes a $500,000 gift of cash to establish a CGA at her alma mater, a public charity. Based on her age, the charitable deduction portion of the gift is $207,546. Donor’s AGI for 2020 is $200,000. She can elect to apply the 100%-of-AGI limitation and eliminate her federal tax liability for 2020. She also carries forward an unused deduction of $7,546 to 2021. Or, she can forego the 100% of AGI limit, giving her a deduction of $120,000 in 2020 and a carry-forward of $87,546 to 2021.

Adding to the complexity of this new AGI limit, Laura Hansen Dean, JD, of the University of Texas at Austin, posted this reminder on Gift-PL: “IRS Reg. 1.170A-8(d)(2)(i) allows a taxpayer to make an election to value a gift of appreciated stock with a high basis (little appreciation) at cost basis and not fair market value and so be able to use the 50% charitable deduction ceiling instead of the 30% of AGI ceiling.”[4] Thus, the question is: Can a donor make the cost-basis election for high-basis stock and apply the 100%-of-AGI limit?

Again, the answer would be no, simply because the asset being given is not cash, notwithstanding an election made to use an AGI limit that would normally apply only to gifts of cash. The solution for a donor who holds stock that has lost much of its value given the recent market downturn is to sell the stock at either a small gain or a loss, and donate the cash to qualify for the 100%-of-AGI limit.

A host of questions arise with any new legislation. Especially with legislation as vast as the CARES Act, we anticipate the IRS will continue to issue guidance on the various possible ways in which the new rules apply. Now is the time to educate yourself, bolster up your network of trusted legal, tax, and financial advisors, and position yourself as a resource with your donors to help them make the best decisions that, in light of these recent changes, meets their philanthropic goals.

[1] Recall that the age to begin taking RMDs was increased from 70.5 to 72 under the SECURE Act.

[2] Thought leaders in charitable giving believe that this is an unintended error in the Tax Cuts and Jobs Act (TCJA) of 2017, which Congress will likely address at some point. As of this writing, technical corrections to the TCJA have not passed Congress.

[3] https://www.dhirubhai.net/pulse/deduct-100-income-2020-charitable-gift-annuity-yes-russell/

[4] https://cgplink.charitablegiftplanners.org/discuss/viewtopic/39/1008

This article first appeared in the June 2020 issue of Planned Giving Today.