The impact of COVID-19 is far-reaching. The pandemic threatens not only public health but also the financial well-being of individuals and businesses globally, with small businesses and nonprofits hit especially hard. On March 27, the president signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act to help combat some of this impact. The bill provides both financial relief for nonprofits and increased charitable giving incentives for individuals and corporations.
The first charitable giving tax incentive, for taxpayers who do not itemize their deductions, allows an above-the-line deduction for cash charitable contributions of up to $300. This provision should help to increase donations from individuals who otherwise may not choose to make a charitable contribution.
The second charitable giving tax incentive, for itemizers, temporarily increases income limits for cash contributions by individual and corporate donors. Now, individuals can deduct up to 100% of their adjusted gross income (AGI) in cash contributions (raised from 60%) and corporations, up to 25% of taxable income (from 10%).
Both incentives are available only for cash contributions made in 2020 and not for contributions to supporting organizations or donor-advised funds. Existing carryover rules still apply. To take advantage of the increased AGI limit on qualifying cash contributions, one must make an election, and complex ordering rules may apply. As always, donors should consult with their tax and legal advisors when considering their charitable giving.
As advisors navigate the new rules and their effect on clients’ giving plans, the following examples highlight newly enabled strategies for consideration with clients.
Example 1: A 60-year-old retiree with a concentration of IRA assets
Historically, retirement account assets have not been efficient to donate when a client wants to make an outsized donation because the 60% AGI limitation has not fully covered the tax liability for the distribution. Until now, the only exception has been qualified charitable distributions (QCD), which allow individuals over 70½ years old to donate up to $100,000 in IRA assets directly to charity annually, without taking the distribution into taxable income.
The CARES Act, with its 100% AGI limits for cash contributions to charity, generally affords individuals over 59 1/2 years old the benefits similar to a QCD; they can take a cash distribution from their IRA, contribute the cash to charity and may completely offset tax attributable to the distribution by taking a charitable deduction in an amount up to 100% of their AGI for the tax year.
This may be a smart strategy for clients between the ages of 59½ and 70½ who are not dependent on existing retirement funds and are planning a large donation in 2020. This can also be a valuable estate planning strategy by reducing the amount of tax that will be payable on IRA assets left to individual beneficiaries.
Example 2: A high-net-worth donor with appreciated assets
Many advisors have asked how the CARES Act affects donations of long-term appreciated assets. The bill does not change the tax deduction available for individuals making contributions up to 30% of AGI in appreciated assets to public charities.
Consider a hypothetical example where a client with an AGI of $250,000 wants to take advantage of the charitable giving incentives provided by the CARES Act. They want a significant portion of their giving to go immediately to local charities supporting the community impacted by the coronavirus crisis. The client is also planning to deploy a second round of charitable support as the crisis progresses and needs may shift.
The client holds highly appreciated assets such as publicly traded stock or even privately held interests. Long-term appreciated assets are the most efficient asset to give due to the desire to reduce taxes on capital gains, yet it is often a difficult asset for some charities to accept. By dividing the funds across various assets and giving vehicles, you can maximize the client’s charitable gift and their tax benefits.
The hypothetical giving plan set forth below involves immediate giving to local charities as well as to a public charity with a donor-advised fund (DAF) program. The strategy could also work with another giving vehicle such as a private foundation—keeping in mind the AGI limits will differ slightly.
Support local charities immediately by donating $100,000 in cash directly to the client’s select charities: $100,000 cash (40% of AGI).
Then, donate $75,000 worth of long-term appreciated assets to a DAF. This contribution minimizes capital gains tax and maximizes the 30% AGI limit for appreciated securities: $75,000 appreciated assets (30% of AGI).
Take advantage of the newly increased AGI percentage limit and top off the funds for future giving with $25,000 in cash to a donor-advised fund: $25,000 cash (10% of AGI).
The client has now established a strong charitable giving strategy for this year, maximizing the temporary tax benefits available under the CARES Act. Importantly, all the funds contributed to the DAF can be quickly disbursed to charities through grant recommendations by the donor. Future waves of support can go out at any time.
The CARES Act has created a number of opportunities for increased charitable planning, and the smartest strategy will depend on each client and their goals. Advisors play a critical role in helping donors maximize available funds under current tax law, allowing them to quickly and effectively respond to the great need felt worldwide, and together, make more of a difference.
Laurie Roche is director of complex assets at Fidelity Charitable.