The CARES Act and Charitable Giving
"Every time we spend money, we make a statement about what we value; there’s no clearer or more direct indication."
~ George Leonard, Mastery
The pandemic continues to impact charitable organizations of all types. They see increased demand for vital services and struggle to generate earned income (like other businesses). Congress included two provisions in the CARES Act to provide some relief.
1) The law allows people who don’t itemize deductions (i.e., don’t file a Schedule A) to deduct $300 of qualified charitable contributions as an “above-the-line” deduction (reducing Adjusted Gross Income, or AGI). The new rule is applicable for tax years beginning in 2020. This change is helpful because a 2017 tax law significantly reduced the number of people itemizing. The reduction is partly due to higher standard deductions and the cap on the deduction for state and local taxes (SALT).
2) The law also temporarily increases the limit on cash contributions made during calendar year 2020 from 60% of AGI to 100% of AGI. This benefits those wanting to make major gifts but who would otherwise be limited based on income.
“Bunching” charitable contributions helps people with charitable goals but who are not itemizing because of the higher standard deduction. “Bunching” just means that they consolidate several years’ charitable contributions into one year. They itemize deductions that year and use the standard deduction other years.
Consider the following hypothetical example. Jack and Diane are a married couple whose annual charitable giving is about $5,000. Additionally, their deduction for state and local taxes is limited to $10,000 and their qualified medical expenses are about $7,000. These deductions, totaling $22,000, are less than the standard deduction of $24,800. They don’t itemize and don’t realize any tax benefit from their generosity.
If they can afford it, Jack and Diane should think about bunching their giving. Let’s say they give $25,000 this year (that’s five years of giving combined). Added to their deductions for state and local taxes and medical expenses, their total deductions would now be $42,000 – much higher than their standard deduction. Then they would take the standard deduction next year. Over time, this could lower their cumulative taxes. Jack and Diane might make larger gifts to their favorite charities now or contribute to a Donor Advised Fund to smooth out their giving.
Bunching deductions can be especially helpful in high income years caused by selling assets or receiving deferred compensation, for example.
For anyone considering a very large contribution, relative to income, the higher 100% of AGI limit makes 2020 an attractive year to bunch.
Quick note: We encourage our clients and friends to think of “year-end” charitable giving in terms of October and certainly well before Thanksgiving. Work-from-home means institutional machinery is slower.