This time of year may have you wondering, how much do charitable donations reduce taxes? And what opportunities are there this year due to tax law changes? The good news is, due to the pandemic, tax rules have been adjusted to enhance the tax benefits of charitable giving. Here’s what you need to know:
CARES Act Opportunities
The most recent change was incorporated within 2020’s CARES Act, which Congress passed to provide relief to those impacted by the global pandemic. In addition to providing paycheck protection for workers and support for small businesses as they struggled to survive the economic impact of coronavirus, the CARES Act also boosted the limit on cash donations from 60% to 100% in some situations. This increase is only valid for tax year 2020 and is limited to cash contributions given to charities that are not donor-advised funds or supporting organizations. Congress also is allowing a limited (up to $300) 2020 cash charitable contribution deduction for non-itemizers.
If you’re over 70.5 and you like to make charitable contributions directly from an IRA, you are able to donate up to a maximum of $100,000 per year via a Qualified IRA Charitable Contribution (QCD). This contribution will count towards your required minimum distribution, and because the distribution goes directly to the charity, it doesn’t increase your income and it still allows the donor to take advantage of the increased standard deduction.
Speaking of the increased standard deduction, when the 2017 Tax Cuts and Jobs Act (TCJA) boosted the standard deduction to $12,400 (for 2020) for individual taxpayers and twice that for married couples filing jointly, it cut the number of people taking itemized deductions, effectively removing an incentive for charitable giving. With only 13.7% of taxpayers estimated to have itemized their 2019 taxes, we have previously written about the benefit of “bunching”. Effectively, individuals can bunch their donations into a single year, thus allowing them to continue giving to the charities that they believe in while still taking an itemized deduction.
While the TCJA’s boost in standard deduction decreased the percentage of people itemizing, at the same time it boosted the deductibility of cash contributions being made from 50% to 60% of the donor’s adjusted gross income, making it more attractive for individual donors to give cash gifts.
SECURE Act Opportunities
Finally, in late 2019 Congress passed the SECURE ACT, which made a couple of notable changes, including pushing the age at which retirement plan participants need to take required minimum distributions (RMDs) from 70½ to 72, and taking away the ability for account holders to designate non-spousal beneficiaries who could hold onto them over the course of their entire lifetimes, taking distributions at will. Under the SECURE Act, those distributions need to be completed within 10 years’ time, making it a potentially better option to making the beneficiary a lifetime-income charitable vehicle in the form of either a remainder trust or a gift annuity funded with the account proceeds.
By indicating a beneficiary who will receive income over the course of their lifetime, you get the advantage of accomplishing the initial intent of giving to the beneficiary, and then upon the beneficiary’s death, whatever is left in either an IRA or a life insurance policy structured in this way gets distributed to the original benefactor’s designated charity.
Charitable contributions are an important part of our individual legacy. And when structured properly, they can also offer tax advantages. For more information on how you can leverage the new tax laws to benefit causes you care about as well as your own personal finances, contact Cray Kaiser today.
Please note that this blog is based on tax laws effective in December 2020, and may not contain later amendments. Please contact Cray Kaiser for most recent information.