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While it’s far too early to begin calculating the human and an economic toll of the COVID-19 pandemic, there’s growing concern that charitable organizations—many of whom are being relied upon more heavily than ever to provide essential services and assistance—may be among those hit hardest. That’s where The Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") may offer some much-needed relief. The CARES Act, which provides emergency financial assistance to individuals, families and businesses affected by the COVID-19 outbreak, offers significant incentives for those who are in a position to give, to dig deep this year—including the ability to offset up to 100% of taxable income for 2020.
New above-the-line charitable contribution
Among the many provisions contained in the $2 trillion aid package signed into law on March 27, 2020, is the expansion of certain tax deductions for 2020, including a new "above-the-line" deduction of up to $300 for individuals making cash donations to charity who do not itemize and will take the standard deduction on their 2020 tax returns.
“You can offset up to 100% of your income in 2020 with charitable contributions.”
Percentage limitations for cash gifts are suspended
For those who will itemize, the incentive to give is even greater. The Act removes the 60% of adjusted gross income (AGI) limitation for most cash gifts to public charities for 2020. That means you can offset up to 100% of your income in 2020 with charitable contributions. Contributions in excess of this amount can be carried forward for five years subject to the 60% of AGI limit in those years.
However, both the above-the-line deduction for those who take the standard deduction and the suspension of the percentage limitation in 2020 only apply to cash contributions and are not available for contributions to donor advised funds or gifts to 509(a)(3) supporting organizations.
Loosened restrictions for corporate giving
The CARES Act also loosened restrictions for corporate giving. Normally, a corporation cannot deduct charitable contributions that exceed 10% of its taxable income for the year. However, any amount over the 10% limit can be carried over for up to five years. Under the CARES Act, the taxable income limit on 2020 charitable gifts of cash rises to 25%.
“This temporary relief of income limitations on charitable gifts, offers significant planning opportunities.”
Temporary measures offer significant planning opportunities
This temporary relief of the income limitations on charitable gifts offers significant planning opportunities for those who may want to consider recognizing certain income in 2020, since it could be fully offset by charitable gifts. For example, while these measures do not apply to gifts of securities, if you have securities that have declined in value below your cost, you could choose to sell those securities, realize the capital loss, and contribute the cash without regard to percentage limitations.
Another approach would be to use the capital loss to offset gains on the sale of appreciated assets to generate cash that can be used to make charitable contributions without percentage limitations. Even if you recognize a capital gain, by donating the sale proceeds, you could eliminate taxes on ordinary income, leaving only capital gains to be taxed.
While these temporary changes for 2020 can help those making sufficiently large cash charitable contributions to eliminate any taxable income for this tax year, be sure to discuss all strategies with your tax and financial advisors before taking action.
The importance of giving now
There’s another reason to consider increasing your charitable contributions this year if you’re in a position to do so—they’re needed more than ever. Entering this year, many charitable organizations were already reeling from a drop in individual donations due to changes in the tax law, which took effect in 2018. The law doubled the standard deduction for families to $24,000, which meant far fewer households were in a position to itemize and take the charitable deduction. As a result, charitable giving by individuals fell 1.1% to $292 billion in 2018 compared with 2017, according to Giving USA. That marked the first decline since 2013, and a significant reversal from the 5.7% increase in individual giving in 2017.
With more than 26 million Americans filing jobless claims as of April 23, 2020, coupled with significant backlogs on the part of states in processing claims and benefits, food banks and other assistance programs are quickly becoming overwhelmed by the rapidly growing need in communities throughout the country. Feeding America, a national network of food banks, reported a roughly 95% increase in demand for food assistance compared to last year—an average increase of 70% since the pandemic began. Lines in many cities stretch for miles as food banks struggle to keep up with demand. Recently, in San Antonio, 10,000 cars waited at a food distribution point run by the San Antonio Food Bank. According to the Guardian, the number of people lining up in Phoenix, Arizona has tripled. Making matters worse, Feeding America reported that they’ve seen a 64% decrease in donations in recent weeks.
Nonprofits facing lost and declining revenue due to the pandemic have told Congress they estimate a need for $60 billion in emergency funding to provide services to a growing number of Americans in need. These include organizations in the healthcare arena providing essential support services to low-income and older Americans, as well as those providing food assistance and other critical services.
While the CARES Act provides a tremendous incentive for those seeking to make a difference in 2020 through charitable giving, it’s important to work closely with your tax and financial advisor to coordinate your tax and charitable giving strategies. Your advisors can provide a detailed tax projection so that you will be fully aware of how a particular strategy would impact your overall tax and investment planning.
