As we enter the year-end giving season, it is important to remember the practical implications of the tax law changes made earlier this year as a part of the economic stimulus packages in response to COVID-19. The CARES Act (passed into law on March 27, 2020) contains provisions that potentially affected the planning considerations of your donors for this year.
Keep in mind that these are not the primary reasons a donor makes a gift. Your mission matters the most. Tax planning tends to affect how they give, not why.1. New, temporary universal charitable deduction. The CARES Act created a new universal charitable deduction of up to $300 for contributions made this year. In recent years, we have seen other federal tax law changes that have reduced the number of taxpayers who itemize their deductions. As a result, we have seen a decline in the number of donors who are in a position to claim the charitable deduction associated with their gifts. This new universal charitable deduction will reverse that trend for this year only. Everyone who claims the standard deduction will now be able to claim this special charitable deduction for gifts up to $300 (this does not include in-kind gifts and also does not include gifts made to Donor Advised Funds).
Practical implications: this is potentially beneficial to your annual giving program. Make sure your website reflects this temporary opportunity and, where appropriate, include a reference to this in your year-end e-Marketing.
The future: Prior to COVID-19 and the CARES Act, many have advocated for a permanent universal charitable deduction. Be sure to monitor this situation. If this is considered successful, there may be an extension beyond 2020.
2. Changes to charitable deduction limitation. For those who do itemize their deductions, there is a limit to the amount that they can claim in a single year. Typically, for cash gifts, a donor can claim a charitable deduction up to 60% of their Adjusted Gross Income. The unused portion above that amount, if there is any, would then roll to the next year (and for up to five extra years… a total of six tax returns). The CARES Act now allows a donor to claim up to 100% of AGI for cash gifts made this year.
Practical implications: This is not as widely applicable as the new universal charitable deduction. Update your website. Plan to mention this to donors who may be considering larger contributions, especially if they are accustomed to spreading out their support over a period of years because of this limitation. Some donors might consider accelerating their intended commitments for this year because they will be able to claim a larger deduction than they expected in 2020. This may be particularly true if their support is also related to the immediate needs of your organization or the immediate needs provided by your organization.
3. Changes to retirement plan distributions. Typically, individuals who have retirement accounts, such as a traditional IRA, 401k, or 403b, must withdraw from those accounts each year when they reach a certain age. For many years, the age of Required Minimum Distribution (RMD) was 70-1/2. Recently, this was changed to age 72. Donors who have been obligated to make this withdrawal but have also believed that this represents additional taxable income that they don’t presently need have been able to make charitable IRA rollover contributions directly from their traditional IRA (not 401k or 403b) to charitable organizations up to a maximum of $100,000 per year. These contributions would count toward their RMD obligation and would allow them to avoid receiving taxable income.
The CARES Act has temporarily suspended the RMD obligation for 2020. Donors will not need to make any withdrawal if they don’t want to do so.
Practical implications: Although the CARES Act does not forbid the use of the charitable IRA rollover, the impulse to use this type of gift has been reduced in 2020. Update your website to reflect this change but don’t eliminate all references to it. There remains long-term benefit to ensure that your donors are aware of this opportunity for the future even if it isn’t as favored for 2020. As you continue to receive inquiries from donors to complete this type of gift, ask if they are aware of the changes to the RMD and be sure to encourage them to speak with their professional advisors to ensure that they receive advice that is tailored to their specific situations.