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November 30, 2020

Making the Most of Year-End Charitable Planning

Please read important disclosures HERE.

Traditionally, many individuals tend to think more about charitable giving in the 4th quarter of the year. Recognizing the financial challenges faced this year by not only individuals and businesses but also by nonprofit organizations, last March, the government signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a massive economic relief package that contained significant incentives to encourage charitable giving to non-profits and to provide additional tax benefits to taxpayers contributing to charities. For those of you now focusing on your 2020 plans for charitable giving, a review of some of the current rules on charitable giving may provide helpful guidance in directing year-end gifts.

$300 Above-the-Line Deduction for Those Who Take the Standard Deduction

The Tax Cuts and Jobs Act passed in December 2017 included a nearly doubled standard deduction (for 2020, the standard deduction for a single taxpayer is $12,400 and for married and filing jointly it is $24,800). As a result of the higher standard deduction, fewer taxpayers itemize and can claim an itemized deduction for charitable giving.  However, with the passage of the CARES Act, taxpayers who take the standard deduction on their 2020 tax return can still claim an “above the line” deduction of up to $300 for cash donated to public charities. This means that up to $300 can be deducted from a taxpayer’s gross income, which reduces taxable income. Contributions to donor advised funds are not eligible for the $300 above the line deduction.

Charitable Tax Deductions For Those Who Itemize

For those taxpayers who plan to itemize qualifying expenses on their 2020 income tax return, subject to certain limitations, donations of cash, securities, or property to qualifying organizations can also be taken as an itemized deduction. Not all qualifying donations are deductible in the year made since the IRS has imposed several limitations on the amount that can be deducted. Generally, a taxpayer can carryover contributions to future years that are not able to be deducted in the current year because the deductions exceed certain limitations. The excess can be deducted in each of the next 5 years until it is all used but not beyond that time.

  • Limitations Related to the Donor’s Adjusted Gross Income

The charitable deduction that a donor can claim in one tax year is limited by the donor’s adjusted gross income (AGI). The overall limit is generally 50% of AGI, but the CARES Act allowed for cash donations to be made to public charities in 2020 of up to 100% of AGI.

  • Limitations Related to the Type of Charity

Income tax charitable deductions are also limited depending on the type of organization to which the gifts are made (i.e., whether to a public charity, donor advised fund or to a private foundation).

  • Limitations Related to Donated Property

Once the taxpayer determines their AGI for a given year, the income tax charitable deduction for gifts to public charities are also limited based on the type of property donated. As mentioned earlier, the CARES Act increased the maximum deduction amount for cash donations made to public charities in 2020 from 60% of AGI to 100% of AGI. Contributions to donor-advised funds and supporting organizations do not qualify for the 100% of AGI deduction. However, individual donors can still deduct up to 60% of AGI in cash given to a donor-advised fund and up to 30% of AGI in appreciated assets contributed to a public charity or to a donor advised fund. Excess deductions can be carried forward for up to five subsequent tax years.

The following table highlights the AGI limitations on charitable deductions.

2020 AGI Limitations on Charitable Deductions

Type of PropertyType of OrganizationLimitation on Tax Deduction
CashPublic ChairtyUp to 100% of AGI in 2020/ 2021-2025 60%
Donor Advised Fund (DAF)60% of AGI
Private Foundation30% of AGI
Short term capital gain property or ordinary income propertyPublic Charity, DAF or
Private Foundation
30% of AGI
Long term capital gain propertyPublic Charity or DAF30% of AGI
Private Foundation20% of AGI

A Planning Opportunity for IRA Qualified Charitable Distributions

The CARES Act did not change the rules concerning qualified charitable distributions (QCDs). Individuals over the age of 70 ½ can donate up to $100,000 annually in IRA assets directly to charities, without including the distribution in taxable income.

Because under the CARES Act an individual in 2020 can elect to deduct up to 100% of AGI for cash charitable contributions to public charities, individuals over 59 ½ can avail themselves of benefits similar to a QCD. For instance, they can take a cash distribution from their IRA, contribute the cash to a public charity, and completely offset the tax attributable to the distribution by taking a charitable deduction in an amount up to 100% of their AGI for the tax year.

Maximizing Charitable Giving In 2020

The following example shows how one couple could maximize their charitable gifting in 2020.

Harry and Susan wish to maximize their 2020 charitable giving and wonder if they should give appreciated securities, cash, or make qualified charitable deductions from their IRAs. They also have a donor advised fund that they would like to contribute to in their charitable planning. Their AGI for the year is projected to be $200,000. 

The most that Harry and Susan can gift in 2020 is $300K through a combination of a $100K gift to public charities or their donor advised fund, $100K gift of cash to a public charity, and a $100K QCD. 

Here are the 2020 deduction limits and a few possible gifting alternatives for Harry and Susan.

$200K AGI – Charitable Deduction Limitations

2020 Charitable Deduction Limitations$200K AGI Example
Combination of stocks and cash limited to 50% of AGI 1$100,000 1
60% of AGI limit for cash gift to DAF$120,000
30% of AGI limit for long term stocks$60,000
1 Generally 50% of AGI, with the exception of cash donations made to public charities in 2020 of up to 100% of AGI.

Possible Charitable Gifting in 2020 for Harry and Susan

1. Cash gift to public charity$200,000
2. Cash gift to public charity

Cash gift to DAF
$100,000

$100,000
3. Stock gift to DAF

Cash gift to DAF

Cash gift to public charity
$60,000

$40,000

$100,000
4. The QCD sits outside of the deductions for itemized gifts and therefore Harry and Susan could also give $100,000 from their IRAs to a public charity. The QCD is given tax free, does not impact the itemized deduction limits and reduces the IRA balance thus reducing the amount of taxable income from future RMDs.$100,000

If you are interested in learning more about how to maximize charitable giving in 2020, please contact your B|O|S wealth management team to review your financial situation.

Filed under: Financial Planning

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