If you are considering giving to those affected most by the coronavirus pandemic, the new CARES Act, signed into law in March, provides tax incentives for donors.
Charitable deductions enhanced. CARES eliminates the adjusted gross income limitation (previously 60%) on cash charitable deductions and provides up to a $300 cash charitable deduction for those who do not itemize deductions. The idea is that ultra-charitable taxpayers be able to offset 100% of their income with charitable deductions in 2020. In addition, for taxpayers who contribute more than their 2020 limit, the excess is not lost but can be carried forward up to 5 years. Both options require the cash to go directly to charity—i.e., not through a foundation or donor-advised fund.
Stimulus check donations an option. Stimulus checks (up to $2,400 for married couples filing a joint tax return and $1,200 for single filers) coupled with new charitable deductions provides opportunities to give directly to charities. In today's environment, every donation helps. So $1,200 each from a large pool of donors can add up quickly to be very impactful. Taxpayers who don't need the stimulus checks for living expenses might consider using these funds to expose children to philanthropy for the first time or engage them further in the family's charitable goals.
Qualified charitable distribution continues. Required minimum distributions from retirement accounts are waived for 2020. But the waiver does not eliminate one's ability to make a qualified charitable distribution (QCD). QCDs allow taxpayers 70-1/2 or older to transfer up to $100,000 per individual directly from an IRA to charity. With QCDs taxpayers don’t have to report the distribution as income but also don't get the charitable deduction. However, there is typically at least a marginal tax benefit, and often times a much bigger benefit, from sending the distribution directly to charity versus taking the money as income then making a charitable gift.
Roth conversion can be timely. Donors looking to make larger gifts to charities but have limited access to income sources, may want to consider converting a traditional IRA to a Roth IRA. The conversion raises taxable income but CARES allows you to claim an offsetting charitable deduction on the taxable amount. Donors can then benefit from the tax-free growth and tax-free withdrawals of the Roth IRA.
Charitable lead trusts benefits. Charitable lead trusts, which provide an annuity payment to charities for a set number of years, are particularly relevant today because of the low interest rate environment. These trusts are typically used by philanthropists with a big tax bill and a desire to support charities and pass on wealth to their heirs. Let's say the donor sets up a 10-year charitable lead trust. The donor gets an immediate charitable tax deduction based on the fair market value of the annuity payments going to the charity. Because interest rates are historically low the donor gets a bigger upfront charitable deduction. At the end of the 10 years, the remaining assets usually fund a trust that benefits the donor's family members.
William Blair COVID-19 Philanthropic Resources. Our special guide is filled with tips and resources for philanthropists and nonprofits (PDF) to assist them during these challenging times. It includes links to local rapid relief funds, community foodbanks, and international charities. Additionally, there are suggestions on giving with environmental, social, and governance factors.
For more information about these strategies, contact your William Blair representative.
This information has been prepared for informational purposes and is not intended to provide, nor should it be relied on for, accounting, legal tax, or investment advice. Please consult with your tax and/or legal advisor regarding your individual circumstances.