The Coronavirus Aid, Relief, and Economic Security (CARES) Act has temporarily created a new $300 charitable deduction for nonitemizers but also gives larger donors an opportunity to save more tax on their gifts. Here is what charitable donors need to know.

Related Read: CARES Act Expands Financial Options for Impacted Plan Participants

Limit suspended

The CARES Act relaxes the income-based deduction limit on cash gifts made to public charities in 2020. Ordinarily, such deductions are limited to 60% of adjusted gross income (AGI) and excess contributions may be carried forward up to five years to provide a tax benefit in those years. This year, the deduction limit is 100% of AGI.

This change may present an opportunity for people who use their IRAs to make large charitable donations, particularly if they were at least 70½ years old by December 31, 2019. To make larger tax-free distributions for charitable gifts, you might take a taxable withdrawal from your IRA and donate the cash to a qualified public charity. Because you are entitled to deduct up to 100% of your AGI, your charitable deduction completely offsets the income generated by the IRA withdrawal.

Note, that the CARES Act suspends required minimum distributions (RMDs) for 2020. Thus, if the reason you typically make donations from your IRA is to eliminate taxes on your RMDs, there is less incentive to make such donations.  In fact, this year you may want to withdraw only what you need to cover expenses or make charitable contributions.

Donation considerations

Before you make a financial gift, keep in mind that:

• To qualify for the tax benefits discussed, donations must be made in cash to a public charity, not to a donor-advised fund, supporting organization or private foundation; and
• Donating appreciated securities to charity is always the best strategy because it allows you to avoid taxes on any gains. But the deduction limit for appreciated stock donations is generally only 30% of AGI. If you want to make a large stock contribution in 2020, you can augment it with more cash contributions than you normally could.

As in previous years, donating stock that has declined in value is never a good strategy because you lose the ability to write off the loss.

They need you

These tax incentives are designed to encourage Americans to support struggling charities.  It is possible more tax legislation with additional charitable giving breaks could be signed into law. Contact your ORBA tax advisor for the latest information.

For more information, contact Jacqueline Janczewski at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Wealth Management Services.