2020 Charitable Giving Tax Planning Considerations
This has been a year of unexpected challenges due to the COVID-19 pandemic. Businesses, nonprofits, and individuals alike have been negatively affected economically, socially, and financially.
To help provide relief and encourage charitable giving, Congress included two provisions related to charitable contributions in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which passed earlier this year as described in this BKD Thoughtware® article.
CARES Act Provisions Affecting Charitable Contributions
To recap, the first provision allows an above-the-line deduction of up to $300 for taxpayers who don’t itemize deductions on their 2020 return. This deduction is for cash contributions made to certain qualifying Section 501(c)(3) public charities. Due to the increased standard deduction provided under the Tax Cuts and Jobs Act, which is $12,400 for individuals ($24,800 for married filing jointly) for 2020, many taxpayers haven’t been able to deduct their charitable contributions, since the standard deduction was more beneficial; however, this CARES Act provision will allow more taxpayers who make charitable cash contributions to take advantage of this deduction.
The second provision temporarily increases the charitable cash contribution adjusted gross income (AGI) limitation for taxpayers who itemize their deductions in 2020 from 60 percent to 100 percent. If more than 100 percent of a taxpayer’s AGI is contributed, excess contributions may be carried forward to future years. In addition to this increase, the limitation for charitable contributions of food inventory also was temporarily increased from 15 percent to 25 percent.
Another key provision within the CARES Act that may affect charitable giving pertains to qualified retirement plans. The rules for required minimum distributions (RMD) from an individual’s retirement plan have been waived for 2020. In prior years, one charitable giving strategy for those at least 70 1/2 years of age was to make a qualified charitable distribution (QCD) of up to $100,000 from an IRA to a charitable organization, which would be applied toward the RMD and wouldn’t be included in income. Under this strategy, taxpayers could report a lower AGI, allowing them to decrease their taxable Social Security income and be taxed in a lower bracket. Although RMDs aren’t required this year, consult with your tax advisor on whether this is still a beneficial strategy for you to pursue.
If you’re planning to make a tax-deductible contribution to an organization, it’s important to determine whether the organization is a qualifying organization according to the IRS. Some organizations that aren’t considered qualifying organizations are political organizations, lobby groups, social clubs, most foreign organizations, and individuals. You also should be cautious when attempting to make a tax-deductible contribution through crowdsourcing websites, such as GoFundMe, as not all organizations listed on those sites are qualifying organizations. The IRS has provided a Tax Exempt Organization Search tool to help taxpayers determine whether their contribution would be tax deductible.
The most common resource for taxpayers to donate is cash. The value of cash is easily determined, whereas other types of donations may require an appraisal. For donations above $250, documentation can be easily maintained by retaining receipts from the organization that include:
- The organization’s name
- The contribution amount (if cash)
- A description of the contribution (if noncash)
- A statement that no goods or services were provided by the organization in return for the contribution (if applicable)
- A description and good faith estimate of the value of goods or services, if any, the organization provided in return for the contribution
Many taxpayers also volunteer their professional services for a charity or a charitable event, but the monetary value of these services can’t be deducted as a charitable contribution. Taxpayers may, however, deduct certain unreimbursed, out-of-pocket expenses made while performing the volunteer services, such as travel, lodging, or meals. They should maintain detailed receipts as documentation for these expenses.
For more information on tax planning through charitable giving, reach out to your BKD Trusted Advisor™ or complete the Contact Us form below.