Charitable Giving and the CARES ActSubmitted by MIRUS Financial Partners on April 24th, 2020
The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed on March 27, 2020. It’s one of the biggest stimulus packages in our nation’s history and provides more than $2 trillion in relief for almost every part of the U.S. economy. It also includes several provisions for tax benefits for charitable contributions.
You can now Deduct 100 Percent of Income With a 2020 Charitable Gift Annuity
Notably, the CARES Act allows individuals to now deduct up to 100 percent of their personal income in 2020 for gifts of cash for “qualified contributions.” While this tax deduction already existed in a similar form, the CARES Act raised the ceiling from the previous limit of 50 percent of income.
The limit on cash contributions from corporations was also raised from 10 percent to 25 percent in 2020. Qualified cash contributions in excess of the 25 percent limit can be carried forward for up to 5 years under the usual limits. These increased limits do not apply to donations to a Donor-Advisor Fund (DAF) or Sponsoring Organization (SO.) These changes should encourage more corporate giving in 2020.
To qualify for additional individual tax breaks, personal charitable gifts must be paid in cash during the calendar year 2020 to an organization as described in section 170(b)(1)(A).
For example, if you make $100,000 a year and present a $100,000 check to a public charity during the 2020 calendar year, you can now deduct $100,000 from your 2020 taxes.
Quid Pro Quo Cash Contributions Have Different Conditions
For example, if you donate a $100,000 check to a qualified public charity during the 2020 calendar year in exchange for a table at a fundraising event worth $10,000, you may only deduct $90,000.
That’s because the $90,000 is (1) a contribution paid in cash (2) during the calendar year 2020 (3) to a public charity. The cost of the $10,000 table was a sale and not a donation.
Quid Pro Quo Endowment Cash
Endowment funds often allocate funds to future scholarships or projects that will occur in the coming years. Still, the tax credit stands if the donation is made in 2020, even if the recipient has no intention of spending that donation in 2020.
For example, imagine that you donate a $100,000 check to a public charity in 2020, in exchange for a $10,000 table at a gala fundraiser. This is a fundraiser for a permanent scholarship fund. Your deduction is $90,000, and the price of the table is considered a sale. In this example, even though the gift is designated for a permanent scholarship fund (endowment) it doesn’t alter its taxable status.
Charitable Gift Annuities
The same rules apply for a charitable gift annuity (CGA.) If you donate a $100,000 check to a public charity during the 2020 calendar year, in exchange for a lifetime annuity worth $50,000, you can deduct the remaining $50,000.
In this example, the $50,000 annuity is considered a purchase, and the additional donation amount is a qualified deduction.
Charitable Remainder Trusts May Present an Exception
If you donate $100,000 to a charitable remainder trust (CRT), a public charity is not getting cash, but rather a future interest. Additionally, cash is paid to a CRT, which is not classified as a public charity.
However, some argue that the contribution is still going to a public charity in 2020, even though it is not the actual cash itself. Some say that a contribution need only be “paid in cash” by the donor, not to an organization. In other words, the donor is donating cash, even if the organization is not receiving it immediately. In this scenario, a donor makes a qualified contribution, but no cash goes to a public charity in 2020 (although they will receive it in later years.)
When debating these kinds of situations, it helps to revisit the legislative intent, which was to get cash to public charities right now as part of a 2020 stimulus package. Donor-advised funds and supporting organizations were excluded because of the immediacy of the need. With this in mind, CRT donations may not be eligible for the expanded donation ceiling.
Want to Explore Your Options?
Taking advantage of tax breaks outlined in the CARES Act may help provide valuable relief in 2020. However, all donations should be a part of your long-term financial plan and should be made in consideration of your 5-year tax window for claiming these deductions. Each situation is different and presents its own challenges and opportunities.
We’re here to help at Mirus Financial Partners. Contact us and let’s talk about your situation.
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