Among the many provisions in the 880-page Coronavirus Relief and Economic Security (CARES) Act are changes to rules for charitable deductions that can help direct more funds to nonprofits and boost the tax benefits for donors.
They are intended to get more money to nonprofits whose services are in extremely high demand as their revenues are plummeting.
“Charities need funds right now. not just for COVID-19 purposes but because their fundraising galas, walkathons, etc., are being canceled and because their donor bases are under financial stress,” says Tony Oommen, vice president and charitable planning consultant at Fidelity Charitable.
Here are some of the highlights of the CARES Act changes for charitable donations.
1. $300 Above-the-Line Charitable Deduction
Taxpayers who take the standard deduction can now claim a $300 above-the-line deduction for charitable contributions.
“This is huge because since the 2017 tax law giving has trended downward, particularly in that band of people who were once itemizing and not are taking the standard deduction,” says Rich Cohen, the chief spokesman and chief operating officer of the National Council of Nonprofits. (The tax overhaul doubled the standard deduction.)
The deduction is currently only good for the 2020 tax year, but Cohen’s organization, which represents more than 25,000 nonprofits, would like to see it extended retroactively to 2019 since that tax filing deadline has been extended for three months, and through 2021 because, says Cohen, “the recovery won’t happen in the next six months. It will take a long time.”
2. Expanded Tax Deduction Limit for Individuals
In more normal times, the deduction for charitable donations is capped at 60% of adjusted gross income (AGI). Under the CARES Act, it is capped at 100% of AGI for 2020, so long as the additional contributions are made directly to a charitable organization.
Donor-advised funds are excluded from the new limit, but donors can still give 60% of AGI to a DAF and another 40% of AGI directly to a charitable organization, or vice versa.
The expanded AGI limit also has tax benefits for withdrawals from IRAs used for charitable gifts. Those withdrawals, too, are tax deductible so long as they don’t exceed 100% of a donor’s AGI. The donor would simply need to claim the deduction on their tax filing.
Before the CARES Act, donors over 70-½ could make a tax-free donation to a charity via the custodian of their IRA through a qualified charitable distribution (QCD) but only up to an annual limit of $100,000. Now they are no longer limited by that cap. (Note the 70-½ age still applies even though RMDs are not required now until after age 72.)
3. Expanded Tax Deduction Limit for Corporations
Corporations, too, can make more tax-deductible contributions to charities. The limit on those contributions in 2020 was increased under the CARES Act, from 10% to 25% of taxable income.
4. Bigger Deduction for Food Donations
If there was ever a time that food pantries and food banks needed more donations, it’s now. Millions of more people are out of work and schools are closed, some of them no longer providing meals to students, as a result of the COVID-19 pandemic.
Feeding America, the nation’s largest domestic hunger-relief organization, projects that 17.1 million more Americans are experiencing food insecurity today than previously, estimating that $1.4 billion more will be needed over the next six months to provide enough food for those struggling with hunger. That’s equivalent to a 30% increase to the baseline six-month operating costs of 200 member food banks nationwide, the organization says.
“The people we serve and the charitable food system in the United States are facing a ‘perfect storm,’ with surges in demand, declines in food donations and volunteers, and disruptions to normal operating procedures, as a result of the COVID-19 crisis,” said Claire Babineaux-Fontenot, CEO of Feeding America, in a statement.
The CARES Act increases the tax deductibility of donations from food inventories of a trade or business, including C corporations, from 15% to 25%.
— Check out Tyrone Ross: How Advisors Can Transform From ‘Takers’ to ‘Givers’ on ThinkAdvisor.