As part of your charitable gifting strategies this year, the CARES Act and subsequent Consolidated Appropriations Act of 2021 have created a unique opportunity to earn additional tax savings from your philanthropy.
The sweeping economic benefits created from the original CARES Act in March 2020 included beneficial changes to encourage charitable giving during the pandemic. In particular, taxpayers who don’t itemize deductions may take a charitable deduction of up to $300 (up to $600 for married, joint filers) for cash contributions made in 2020 to qualifying organizations. The IRS describes qualifying organizations to include religious, charitable, educational, scientific or literary in purpose. Excluded donations would include gifts to individuals, a political organization or a social club, as well as foreign organizations. The act also temporarily increases limits on contributions of food inventory from 15 percent to 25 percent.
However, the most impactful opportunity is for taxpayers that itemize deductions. The CARES Act temporarily increases the charitable cash contribution adjusted gross income (AGI) limitation for taxpayers who itemize their deductions in 2020 from 60 percent to 100 percent. If the taxpayer contributes more than 100 percent of their AGI, they can carry forward any excess contributions to future tax years. As for corporations with certain charitable cash contributions made in 2020 (and 2021), the 10% taxable income limit is increased to 25%.
Limitations for Donations from IRA Accounts
Be aware that the CARES Act suspended the required minimum distribution (RMD) for retirement accounts owned by individuals who are least 70 ½ years old. From a tax planning perspective, removal of the RMD may make charitable donations from your IRA account less advantageous.
In the past, the IRS allowed qualified charitable distributions (QCDs) of up to $100,000 from an IRA to go to a charitable organization, and it allowed that donation to count toward the individual’s RMD. It also allowed the individuals to report a lower adjusted gross income, placing them in a lower income bracket while also decreasing their taxable Social Security income. With the impact of the RMD benefit removed, some discussion with a tax professional is advised.
If we click back in time for a moment, some might recall that the federal government’s expectation in March 2020 assumed the worst of the pandemic would crest and be history by the Summer of 2020. As such, the CARES Act budget called for these provisions to be single-year benefits.
However, as the new fiscal year approached, it became apparent to legislators that further economic stimulus would be required, leading to the Consolidated Appropriations Act of 2021 (CAA). This $2.3 trillion spending bill (the largest appropriations bill ever passed) extends, among other items, a multitude of CARES Act initiatives due to sunset in 2020, including: extended unemployment benefits, PPP loan forgiveness and aid for universities, as well as help for live venues and stimulus payments to citizens into 2021.
Signed into law on December 27, 2020, the Consolidated Appropriations Act of 2021 extended for another year the charitable giving rules offered under the original CARES Act. This includes the moratorium on limits for charitable gifting.
A Unique Tax Planning Opportunity
As a result of this legislative extension, individuals that either did not avail themselves of gifting strategies or were not in a position to do so for the 2020 tax season have another opportunity to craft a charitable gift strategy with maximum tax advantages.
The current environment in Washington warns us to expect higher tax and capital gains rates and a reduction or elimination of charitable contribution tax incentives.
Consider these questions for your 2021 tax planning:
- What to donate: cash or long-term depreciated assets? In general, you won’t have to pay capital gains when donating long-term appreciated assets like bonds, stocks or real estate donated to charity. Plus, you may take an income tax deduction for the full fair-market value.
- How will a single large gift impact your longer term estate planning? For example, if you have insurance policies that designate legacy gifts after you are gone, consider how your actions in this tax year may impact longer-term giving plans.
- What about real estate donations? With a current lifetime personal deduction standing at $11.7 million, one might think that real estate holdings will be exempt from your estate. However, with pending tax rate increases and other revenue expansion plans being discussed by Congress, you may consider gifting certain real estate assets to a charitable organization.
- What short-term tax planning should be done? Individuals utilizing a private foundation or donor-advised funds should review their charitable donations with renewed attention toward their tax planning objectives for the short term.
If any of these scenarios sound like your tax situation or if you simply have questions, a tax planning discussion with your CPA should be a top priority right now.