How Charitable Giving Is Changing in 2020
As the need for charitable gifts grows, the CARES Act ushers in changes affecting retirees, non-itemizers, and heavy givers.
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The images are stark: lines of people, wrapping around the block; lines of cars, stretching for miles; hungry people, hurting financially in the wake of the coronavirus pandemic, waiting to pick up food at a local food pantry.
Unfortunately, the food-bank shortage is just one outward manifestation of a larger issue. Thanks to skyrocketing unemployment and mounting bills for many families, many charities find themselves with more demands on their resources than they could ever meet. And that elevated need comes at a time when many charitable organizations have fewer opportunities to raise funds: Galas and other fundraising events have been canceled, as have church services, where collection baskets normally circulate.
The small silver lining is that the CARES Act, signed into law in late March, includes a provision that will make it easier for many taxpayers to receive at least a small tax break for charitable giving--something they may have not been able to do since 2018. The act also lifts the cap on the percentage of income that very heavy charitable givers can give to charity.
At the same time, the suspension of required minimum distributions in 2020 makes the qualified charitable distribution, or QCD, less of a “no-brainer” for retirees than it was in the past. While the QCD is likely to still be advantageous for charitably inclined seniors to use, the fact that retirees could leave their IRAs untouched is a countervailing force, especially during a period of market weakness.
A New Incentive to Give--and Save Receipts
The CARES Act included so many components--including stimulus checks, small-business loans, and the pause on required minimum distributions--that some of the provisions related to charitable giving got lost in the shuffle. A key one is that, starting for the 2020 tax year (meaning the return you’ll file in 2021), taxpayers who claim the standard deduction will be able to take a special “above-the-line” deduction for cash gifts to qualified charities. (The IRS' site allows you to search for charities that qualify.) That means their charitable contributions up to the limits will help reduce adjusted gross income.
Don't get too excited: The deduction is small--just $300, regardless of tax-filing status. Gifts of property don’t qualify; contributions to donor-advised funds don’t qualify, either. But the “above-the-line” piece helps ensure that the many taxpayers who recently may not have been able to claim a tax benefit for charitable contributions may be able to deduct at least some of their contributions. Since the new tax laws went into effect in 2018, many fewer taxpayers have itemized their deductions; without itemized deductions, including charitable contributions, they couldn’t get credit for their charitable gifts. That appears to have had a depressive effect on charitable contributions in 2018. (It’s too early to say whether that falloff in giving persisted into 2019.)
Note that if you’re an itemizer, you won’t be able to claim the new “above-the-line” deduction as well as additional charitable contributions on your Schedule A (itemized deductions). It’s either/or. If you’re an itemizer, your charitable gifts will remain “below the line.”
If you’ve been claiming the standard deduction recently, you may have gotten a bit lax about saving receipts for charitable contributions. But for 2020, you have an incentive to hang on to proof of your contributions--at least up to the $300 limit.
A Conundrum for Retirees
The other big CARES Act-related news for charitable contributions is only indirect. The law suspended required minimum distributions that would otherwise be required of tax-sheltered account holders in 2020.
On the one hand, that’s a welcome development: Putting a pause on RMDs can help retirees’ portfolios recover from the recent market drop, and it also keeps them from having to take an extra-large 2020 distribution because portfolio balances were enlarged at the end of 2019.
On the other hand, the pause on RMDs makes the QCD less of a “gimme” than was the case in the past. QCDs are still allowable in 2020; they enable investors who are age 70-1/2 and older to steer up to $100,000 from their IRAs to a qualified charity (or charities). That, in turn, reduces taxable income. But because those RMDs aren’t required, many investors who would normally be subject to RMDs might choose to leave their IRAs untouched for 2020. That's especially true if their accounts have dropped substantially in 2020's early innings and they can't prune specific holdings that have performed better.
Given that conducting a QCD in 2020 would accelerate withdrawals from tax-sheltered accounts that wouldn’t otherwise be required, some tax experts have suggested that charitably inclined individuals consider holding off on 2020 QCDs. They could then “bunch” the contributions that would have otherwise been made in 2020 into 2021’s QCD, up to the $100,000 limit. If they want to make large charitable contributions in 2020, they might instead consider doing so from their taxable accounts--gifting taxable securities with a low cost basis and/or those that are problematic from a fundamental perspective, for example. This would obviously have the biggest benefit for people who intend to itemize their deductions, including charitable contributions, in 2020.
At the same time, even if a QCD doesn’t satisfy RMDs in 2020--because there are no RMDs--it still carries a tax benefit. It allows the retiree to give pretax assets to charity, and it reduces the amount of the portfolio that will be subject to RMDs in the years ahead. Conducting a QCD in 2020 may be particularly beneficial for people who expect to find themselves in a temporarily low tax bracket in 2020. That enables them to reduce accounts that will eventually be subject to RMDs at a time when it’s advantageous, taxwise, to do so.
Finally, the CARES Act had implications for very large charitable givers, in that it lifts the limit on the amount of charitable gifts that can be deducted (by itemizers) in 2020, from 60% of the taxpayer’s adjusted gross income to 100%. (Gifts in excess of 100% of AGI cannot be deducted.) The increase on the limit doesn’t apply to contributions to donor-advised funds.