Kate McNulty, MA, CHC
Principal of Grants & Philanthropy
While there are few benefits associated with our current pandemic state, if we’re looking for silver linings where we can find them, we might count among them the alterations to the tax code. Considering that the response to the pandemic has greatly impacted our nonprofit healthcare providers and first responders, it is not a bad time to be coming into new tax perks connected to charitable giving.
That is not to mention the myriad of charitable organizations that continually step up to lend a hand when individuals and families experience hardship. Unrestricted cash gifts to hospitals, food banks, shelters, and other health and social support organizations ensure that operations continue and the safety net for people in need is secure. Organizations such as the United Way, which focuses a great deal on supporting local nonprofits, have been able to set up funds like the COVID-19 Community Response and Recovery Fund, designed to lend a hand to our most vulnerable populations.
There are a number of charitable incentives in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), so we took it upon ourselves to outline some of the most notable tax changes below.
INCREASED FEDERAL TAX WRITE-OFFS FOR CHARITABLE CONTRIBUTIONS
First and foremost, for the 2020 tax year, donors will be able to deduct cash contributions to most charities up to 100% of their adjusted gross income (AGI). This is compared to the 60% ordinarily allowed.
This is great news for folks who itemize their taxes, as it may allow said donors to decrease their 2020 federal tax all the way to zero. Additionally, donors will be able to carry forward their unused cash contribution deductions for up to five years. It’s important to note, however, that contributions to donor-advised funds or supporting organizations are not eligible for this increased deduction.
Given that federal income taxes are progressive, there are also scenarios where deducting 100% of your cash contributions might not be advantageous. 2020 tax deduction options will need to be analyzed carefully based on your specific circumstances. For non-itemizers, there is also a $300 charitable deduction which can still help reduce your taxable income through cash contributions to public charities.
For corporations, the deduction for cash contributions to public charitable donations rises from 10% in previous years to 25% of taxable income. This gives corporations the opportunity to make a significant impact on the communities they serve, helping to support people through pandemic-fueled crises.
MINIMUM DISTRIBUTIONS FROM RETIREMENT PLANS
Young or old, it’s never too early to begin retirement planning. Under the CARES Act, most required minimum distributions (RMD) – the minimum amount you are required to take each year from your individual retirement accounts (IRA) – are waived for 2020. Individuals will want to check with a financial advisor to determine if this temporary rule applies to them. The waiver of the requirement will help individuals in a position to forgo the distribution from receiving higher tax bills for 2020.
If your minimum distribution has already begun, the distribution may still be required to move forward through some defined pension plans. Some required minimum distributions that would have started in 2020 now may not have to start until 2021.
QUALIFIED CHARITABLE DEDUCTIONS
Qualified charitable deductions (QCD) are still a really good way for donors 70.5 years of age and older to make contributions to their favorite public charities. Part of the CARES Act temporarily eliminates most RMD, but donors in this age range who choose not to defer their distribution can still donate up to $100,000 from their IRA without paying income tax. For those whose distributions push them into a higher tax bracket, the QCD may be helpful as it reduces the value of the IRA tax-free and, as a result, lessens the amount of upcoming taxable RMD.
Donors must meet the following requirements for a QCD to transfer:
- Be at least 70 ½ years of age at the time of the gift;
- Transfer the gift directly from the IRA administrator to the qualified charity;
- Not exceed $100,000 per person ($200,000/couple with separate IRAs) per annum;
- Gifts cannot fund a Charitable Gift Annuity, Charitable Remainder Unitrust, or Pooled Income Fund;
- Goods or services cannot be exchanged; and
- Donations can’t be to a donor-advised fund, a supporting organization, or a private foundation.
A word of advice if you decide to go this route in 2020: Keep in mind that not all IRA administrators include your (the donor’s) name on the distribution checks. Therefore, if you love (or even just really like), your charity of choice, don’t make them hunt you down. Let them know in advance that your gift is on the way. They will undoubtedly be happy to hear from you and will want to show you their gratitude.
ALTERNATIVES TO CASH CONTRIBUTIONS RIGHT NOW
The CARES Act addressed the sweep of COVID-19 through our country while providing additional tax incentives to encourage you to give charitably as you are able. Of course, your individual health and financial well-being come first and everyone has their own priorities. If you can’t make cash contributions to the charities working to keep us healthy and well during this time, we suggest you consider making in-kind donations. In-kind donations, for those who aren’t familiar, are actual goods and services that are donated instead of giving money to buy needed goods and services.
For example, right now, many healthcare organizations are in need of masks and are even accepting homemade ones. If you know your way around a sewing machine and have some extra fabric stowed away somewhere, this is a great way you can give back right now without opening your checkbook. Additionally, frontline healthcare workers and first responders usually welcome food donations which is also a great way to show your support for the work that they’re doing on our behalf. Perhaps you could consider sending pizzas to your local first responders, healthcare facilities, nursing home staff, shelter staff, food pantry staff, or maybe even grocery store staff who continue to go to work so we can be fed
Before Making Any Decisions, Consult!
It goes without saying that all of these decisions are highly personal and it is important to first check with your financial advisor before making any tax decisions. You may also wish to consult with the charity you are interested in supporting, often times the philanthropy staff will be able to help you shape your charitable giving plan to best suit you.
At Atrómitos, we support our communities in multiple ways. To our great fortune, the people we work and live with are of the same lend-a-helping-hand mindset as we are and are just as excited to have the opportunity to make a greater impact through charitable activities this year. We work with nonprofits on the development of annual philanthropy work plans that suit the needs of the organization and fit the strengths and limitations of their communities.
We hope you and yours are staying healthy and safe during this difficult time.