CARES Act Supersizes Deduction for Charitable Gifts in 2020 and Beyond

by Prof. Robert Bloink and Prof. William H. Byrnes

The CARES Act made several changes designed to encourage charitable giving during the COVID-19 outbreak. The new charitable deduction rules allow every taxpayer to reap the tax benefits of supporting charitable organizations during the outbreak—and, in some cases, the rules have been made permanent to allow even non-itemizers to support their charitable causes on a tax-preferred basis going forward. High net worth clients who are looking for ways to supersize their 2020 charitable giving strategy should be advised that now is the time to take advantage of the expanded tax break—and potentially kill two birds with one stone by diversifying their retirement savings with a Roth conversion to magnify their ability to give in the most tax-friendly way possible.

New $300 Above-the-Line Charitable Deduction

For the 2020 tax year, the CARES Act amended IRC Section 62(a) so that taxpayers are permitted to reduce adjusted gross income (AGI) by $300 for charitable contributions made in 2020 even if they do not itemize. Notably, this new above-the-line deduction is permanent. Although only taxpayers who take the standard deduction qualify for the new $300 deduction, the standard deduction in 2020 is $12,400 for single filers ($24,800 for joint returns), meaning that a large segment of the American population will qualify.

Additional qualification requirements restrict the deduction based on the type of charity involved—in order to encourage gifts to charities most likely to use the funds now, rather than accumulate them for later gifts. To qualify, the contribution must be made in cash and to a charity described in IRC Section 170(b)(1)(A).

Qualifying charities include hospitals, public charities, churches and certain types of private operating foundations. Donor advised funds, supporting organizations and private non-operating foundations are not qualified charities for purposes of the new above-the-line deduction (so that taxpayers would be required to itemize to deduct donations to those types of organizations).

Lifting the AGI Restrictions on Charitable Deductions

Under normal circumstances, taxpayers are only permitted to deduct cash contributions to charity to the extent those donations do not exceed 60% of AGI (10% for corporations). Gifts of appreciated long-term capital gain property are generally subject lower 20% or 30% AGI limits (depending upon the type of charity). While the 20% and 30% limits were not changed, the CARES Act lifted the 60% AGI limit for 2020.

Cash contributions to public charities and certain private foundations in 2020 are, therefore, not subject to any type of AGI limit (again, donor advised funds and supporting organizations are excluded from the expanded gift limit). Individual taxpayers can offset their income for 2020 up to the full amount of their AGI.

Charitable contributions that exceed 2020 AGI 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 rule when carried over into the later year.

The corporate AGI limit was also raised to 25% (excess contributions also carry over to subsequent tax years).

Using the Roth Conversion Strategy

Because the deductibility of cash charitable gifts will not be limited by AGI in 2020, higher income clients might want to consider accelerating anticipated future giving into the current year. Some of these clients may even be interested in opportunities to increase AGI in 2020 in order to truly maximize the value of their charitable deductions without worrying about the carryforward limits.

Taxpayers who want to give more to charity while reaping the full benefits of the unlimited AGI cap might consider converting IRA funds to a Roth in 2020 to supersize their contribution. A Roth conversion increases AGI by the amount converted—therefore expanding the amount that could be deducted in 2020.

Further, with asset values at historic lows, many high-income clients now have the opportunity to convert a portion of their IRA balances to a Roth at lower values, with a correspondingly lower tax burden. If and when the market rebounds, the gain on the converted Roth assets will be tax-free to the client.

Conclusion

The CARES Act charitable giving provisions have been controversial—but for clients who want to find a way to help their favorite charities on a tax-preferred basis, 2020 is the year to act to take advantage of these unprecedented charitable provisions.