What You Need to Know
- The law suspended the rule that generally limits the deduction for cash donations to 60% of the taxpayer’s AGI for 2020 and 2021.
- Charitable contributions that exceed AGI in 2020 or 2021 can be carried over to offset income in a later year.
- High-income clients interested in opening a CRUT should consider doing so before the end of the year.
To encourage charitable giving during the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security (CARES) Act made several important changes to the rules governing the federal deduction for charitable contributions.
More specifically, the CARES Act suspended the rule that generally limits the deduction for cash donations to 60% of the taxpayer’s adjusted gross income (AGI) for 2020 and 2021. This presents an opportunity for charitably inclined clients to maximize their charitable contributions deduction by taking action before year-end.
Clients looking to maximize the tax benefits of charitable giving may be particularly interested in the charitable remainder unitrust (CRUT) structure. But they should be advised that only a few short months remain to take advantage of the valuable CARES Act charitable giving tax breaks.
Background: CARES Act Changes for 2020-2021
Taxpayers are normally permitted to deduct cash contributions to charity only to the extent that the donation does not exceed 60% of AGI. Gifts of appreciated long-term capital gain property are generally subject to lower 20% or 30% AGI limits, depending on the type of charity. As noted, the CARES Act lifted the 60% AGI limit for 2020 and this benefit was later extended through 2021.
Cash contributions to most charities are, therefore, not subject to any type of AGI limit (although some donor-advised funds and supporting organizations are excluded from the expanded gift limit). Individual taxpayers can offset their income for 2020 and 2021 up to 100% of their AGI.
Charitable contributions that exceed AGI in 2020 or 2021 can be carried over to offset income in a later year (the amounts are not refundable, however). Amounts can be carried forward for five years, but those amounts will, under current law, again become subject to the 60% AGI limitation when carried over into 2022 or a later year.
Value of the CRUT Structure
Because charitable deductions are not limited by AGI in 2021, high-income clients may wish to consider acting quickly to maximize their federal tax deduction before the AGI limit is reinstated in 2022. But those clients may also be reluctant to relinquish all benefits and income-generating potential associated with a larger-than-average donation.