April 22, 2020

CARES Act and Charitable Giving

By Carmen Jeschke

Nonprofit organizations are facing substantial hardships due to the COVID-19 crisis. To help, Congress provided significant encouragement to charitable giving for both individuals and businesses in the newly enacted Coronavirus Aid, Relief and Economic Security (CARES) Act.

The legislation is intended to have an immediate impact in the fight against COVID-19, but it is not limited to organizations that are involved in direct response to the pandemic. Rather, it encourages charitable contributions in 2020 for any charitable purpose.

Provisions in the CARES Act to Encourage Charitable Giving

The CARES Act seeks to encourage charitable giving, including smaller contributions, by increasing the tax benefits for making donations. Because the CARES Act is intended to provide immediate benefits to nonprofits, contributions to donor advised funds, supporting organizations, or private foundations are not eligible for these benefits.

For taxpayers who take the standard deduction

The Act creates a new universal charitable contribution. Cash donations of up to $300 to qualifying charitable organizations are eligible for an above-the-line tax deduction in 2020. This deduction is not available to taxpayers who itemize. (Above-the-line deductions reduce taxable income and adjusted gross income (AGI), which may favorably affect other tax computations. Below-the-line deductions simply reduce taxable income.)

For taxpayers who itemize

The Act lifts the cap on charitable deductions, increasing the AGI limit on cash contributions to charities from 60% to 100%. This means donors can take a charitable contribution deduction for the full amount of their AGI. The carryforward rule still applies – excess contributions (amounts above your AGI) may be carried forward for five years, but are subject to the 60% of AGI limitation in those years.

One possible tax strategy would be to take advantage of the increased AGI limit on charitable deductions to convert your IRA (or a portion of your IRA) to a Roth IRA and then offset that income with a charitable deduction. The ability to deduct a larger charitable contribution this year can help offset the income you will realize on the conversion. Your tax or financial advisor can help you determine whether this strategy will fit into your overall financial plan.

Here's how that might work for someone converting $100,000 from a traditional IRA to a Roth IRA.

For corporations

The Act raises the annual charitable contribution limit for cash contributions from 10% to 25%. Food donations from corporations qualify for a deduction of 25%, up from the current 15% cap.

Retirement Plan Minimum Distribution Rules Suspended

The CARES Act has suspended the minimum distribution requirements for 2020. This includes distributions from most qualified retirement plans and IRAs, including inherited IRAs. You still can take distributions from your IRA, and the rules surrounding using IRA distributions to fund charitable giving have not changed. Donors who typically use their requirement minimum distributions to fund their charitable giving may want to discuss with their tax advisor how this change affects their situation. 

Take Advantage of These Provisions and Make a Gift Today

These CARES Act charitable giving provisions can benefit donors who want to help either organizations providing immediate aid to those affected by the pandemic, or those whose mission lies in other areas. These temporary changes offer donors advantages to making gifts now in support of the organizations whose missions matter most to them.