As we move into the last month of this challenging year, there are some additional ways to maximize your charitable giving through the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) that are only available through the end of 2020.
The CARES Act is legislation designed to rescue the economy from the effects of the coronavirus pandemic. It was passed by Congress and signed into law by the President on March 27, 2020. Here is a summary of provisions applicable to charitable giving included in the Act.
1. Deduct $300 without itemizing
You can deduct $300 of charitable gifts without itemizing. The $300 limit is one per tax filing unit. (Married couples filing jointly do not get $600.) This must be a cash gift paid to a 501(c)(3) nonprofit. Note: Donations cannot be made through a Donor Advised Fund but can be donated to one of CFAAC’s Community Grant Programs like the Community Crisis Response Fund.
2. Deduct up to 100% of your income
You can deduct up to 100% of your adjusted gross income using charitable gifts of cash. These gifts must go to a 501(c)(3) nonprofit, not to a Donor Advised Fund. Again, you can donate to one of CFAAC’s Community Grant Programs like the Help Our Neighbors Fund and take advantage of this benefit.
3. Combine a Roth conversion with a donation
A Roth conversion moves money from a standard IRA into a Roth IRA. The benefit: all distributions from the Roth IRA are tax-free, including distributions of future growth. The downside: the money moved into the Roth IRA counts as immediate income. However, this year only, up to 100% of income can be offset by charitable deductions. This includes income created by a Roth conversion. If you already have a multi-year charitable plan or pledge, donating it all this year and combining it with a Roth conversion might make sense.
4. Make IRA gifts at age 70½ +
IRA accounts have no required minimum distribution (RMD) in 2020. However, those age 70½ or older can still make gifts directly from an IRA to a nonprofit up to $100,000. This gift donates pre-tax dollars. The earned income is never taxed because it goes directly to the nonprofit. These gifts must go to a 501(c)(3) nonprofit, not to a Donor Advised Fund. As previously mentioned, you can donate to one of CFAAC’s Community Grant Programs, like Fund for Anne Arundel.
IRA withdrawals between ages 59 ½ – 70½ create no penalties but they are taxable. However, this year cash gifts can be deducted up to 100% of income. If you are already itemizing deductions this can help offset the tax impact from an IRA withdrawal.
5. Move your 401k/403b into an IRA rollover now to prepare for future IRA gifts
There are no RMDs in 2020, but RMDs will return next year for those age 72+. A qualified charitable distribution from your IRA or IRA rollover reduces RMD.
To do this with a 401(k) or 403(b), you must first convert the account into an IRA rollover, but conversion requires first taking any RMD from the 401(k) or 403(b) and paying taxes on that distribution. You can avoid that by making the conversion this year. In 2020, you can convert your 401(k) or 403(b) into an IRA rollover without paying any taxes, even if you are age 72+. Then, you will be set up to make future donations from your IRA rollover whenever you want.
6. IRA beneficiary designation vs. a gift in a will
Many people like to include a charitable gift in their will to support a cause that has been important in their lives. One tax-smart strategy is to leave part of an IRA, 401(k), or 403(b) account to a nonprofit or a Donor Advised Fund. It’s easy to change account beneficiaries by contacting the financial institution. You may want to consider this because heirs will pay income taxes on this money. Starting in 2020, heirs (except spouses) must take out all funds within 10 years of inheriting and pay taxes on those funds. Any portion left to a nonprofit avoids these taxes. If you are leaving money to a nonprofit, consider using these accounts first.
7. Make a charitable swap: Give appreciated investments without changing your portfolio
Donating appreciated assets creates two tax benefits. The tax deduction is the same size as a gift of cash. (The asset must have been owned for a year or more.) Additionally, you avoid paying capital gains tax. A charitable swap allows you to donate old shares of stock and immediately purchase new shares in the same company. Your portfolio does not change but the capital gain is removed. There is no waiting period because this is gain property not loss property. (The “wash sale” rule doesn’t apply.)
8. Take an immediate deduction for donating inheritance rights to homes or farmland
You can donate the inheritance rights to farmland or a home using a special deed and create an immediate income tax deduction. Right now, these deductions are large because interest rates are low.
Example: A 55-year-old donor deeds the inheritance rights to $100,000 home before the end of 2020. The donor gets an immediate income tax deduction of $90,371. The donor keeps the right to use the property for the rest of his life. It’s deductible because, unlike a will, the donor can’t change his mind once the gift is made.
9. Bunch gifts with a Donor Advised Fund at CFAAC
The Tax Cuts and Jobs Act that took effect in 2018 created much higher standard deductions. Fewer people can use charitable deductions because they aren’t itemizing. One way around that is to “bunch” charitable gifts.
Example: A donor puts five years’ worth of donations into a Donor Advised Fund. The donor takes a tax deduction for the entire amount in that year. Because the deduction is so large, the donor itemizes in that year. In later years, the donor makes gifts to charities from the fund. This creates no tax deduction. However, in those years the donor takes the standard deduction instead of itemizing.
10. Use Endow Maryland for tax credit
A Maryland state tax credit called “Endow Maryland” rewards donors who help build permanent charitable funds for local communities across the state and in Anne Arundel County. Endow Maryland allows donors to establish or add to an existing endowed fund at CFAAC and qualify for a 25% state tax credit. CFAAC has a limited number of tax credits, but we still have some available for 2020.
These are just a few ideas to discuss with your professional advisor. They may or may not apply in your situation.
To learn more about how your gifts can make a lasting impact you can reach our Development Department at 410.280.1102 x102 or via email at Amy@cfaac.org.
“Top 10 Ways to give smarter at the end of 2020” – Russell James, J.D., Ph.D., CFP