CARES Act Tax Benefits for Charitable Contributions

Written by David Wheeler Newman

The CAREs Act – the recently enacted gigantic economic stimulus bill – contains two provisions designed to boost charitable giving with enhanced tax benefits.  One provision will provide tax savings to donors making more modest gifts, while the other will benefit donors writing big checks.

Above-the-Line Charitable Deduction

There has been so much major legislation lately, it’s hard to keep up.  The Tax Cuts and Jobs Act, enacted in the waning hours of 2017, now seems like ancient history.  But charitable gift planners will remember that one provision of TCJA2017 that nearly doubled the standard deduction resulted in a dramatic reduction in the number of individuals who itemize deductions.  The Tax Foundation estimated that for 2019, less than 14% of all taxpayers will itemize, down from over 31% in 2017.  This means that less than half as many donors got any tax benefit at all from their 2019 charitable contributions.

Of course, much philanthropy is not motivated by tax savings, but the charitable gift planning community is nevertheless extremely concerned about the long-term impact this reduction in itemizers will have on giving.  As a result, since TCJA2017 the charitable sector has advocated for a charitable deduction that could be used to calculate adjusted gross income (AGI) – an “above-the-line” deduction” – rather than an itemized, or “below-the-line” deduction.

The CAREs Act modifies the calculation of AGI by allowing a deduction of up to $300 for each year beginning in 2020 for qualified charitable contributions by taxpayers who don’t itemize deductions.  A qualified charitable contribution is made in cash to a publicly supported charity or private operating foundation, but not to a supporting organization or donor advised fund.

The limitation of this above-the-line deduction to gifts of $300 will necessarily limit its impact.  However, now that the concept has been introduced into the Internal Revenue Code, there is always the possibility that the limit could be increased – or even eliminated – in future legislation.  In fact, since the passage of the CARES Act, at least one bill has been introduced in Congress that would do just that.

Suspension of Charitable Deduction Limits

Charitable gift planners are familiar with the limitation, as a percentage of AGI, on the charitable income tax deduction that may be claimed for contributions by individuals to publicly supported charities and private operating foundations – generally 50% of AGI and 30% of AGI for gifts of capital gain property.  TCJA2017 added a special limitation of 60% of AGI for contributions of cash during 2018 – 2025.

The CARES Act suspends limitations completely – effectively a 100% AGI limitation, for contributions made in cash during 2020 to a publicly supported charity or private operating foundation, but not to a supporting organization or donor advised fund.  This one-time-only tax benefit for charitable contributions obviously presents some interesting planning opportunities for donors and their advisors.

Does the 100% AGI limitation apply to a charitable remainder trust (CRT), pooled income fund (PIF), or charitable gift annuity (CGA) funded with cash?  In the case of a CRT or PIF, while it is not completely clear, the answer in likely no.  While is it is clear that a cash contribution to either qualifies for the 50% AGI limitation, the provision with that general rule (IRC §170(b)(1)(A)) does not specify that gifts must be made in cash, and in both a CRT and a PIF the gift is a remainder interest in a trust.  This is contrasted with the TCJA2017 60% AGI limitation in §170(b)(1)(G) which specifies cash contributions to qualify for the higher limitation, and a similar specification in the CARES Act 100% AGI limitation.

On the other hand, the 100% AGI limitation would apply to a CGA funded with cash.

Example: Assume a donor who relies on distributions from her investment portfolio but is tired of the nerve-wracking volatility of the stock market wishes to fund a CGA in order to stabilize her income while benefiting her alma mater.  If she withdraws $100,000 from her portfolio at age 75, she can fund a CGA that will pay her $5,800 for life at rates recommended by the American Council on Gift Annuities, and she will qualify for a charitable income tax deduction of a little over $45,000.  If her AGI is projected to be only $50,000 (including the gain she will recognize this year from sale of securities – as if anybody still has appreciated securities!), her charitable deduction would be limited to $25,000 under the normal rules, and $30,000 under the TCJA2017 special rule in effect through 2025, but she will be able to claim the entire $45,000 deduction under the one-time-only CARES Act provision for cash gifts in 2020.

What if a donor makes a cash gift in 2020 that exceeds his or her AGI?  How do carryovers work?  The CARES Act provides that those excess qualifying contributions will carry over for up to 5 additional years, subject to the TCJA2017 60% limitation.

Example: The donor is a wealthy real estate investor whose projected 2020 AGI of $250,000 is relatively low in relation to her wealth.  She has made a major commitment to her alma mater on which $1 million remains to be paid over the next several years.  The college reaches out to several of its major supporters, asking them to consider accelerating their commitments from the last campaign to help the college deal with financial problems arising from the coronavirus crisis.  The donor agrees to pay the entire amount remaining on her pledge — $1 million – and may deduct the portion equal to her 2020 AGI of $250,000 under the CARES Act provision, and may carry over the remaining $750,000 for up to 5 years, subject to the 60% limitation.  Assuming her AGI remains constant at $250,000 per year, she will be able to claim $150,000 per year and will absorb the entire 2020 contribution deduction during the carry over period.

It is highly likely that the creative minds of creative charitable gift planners will be able to come up with planning opportunities to take advantage of the CARES Act suspension of AGI limitations, but remember that this benefit is only available for contributions made in 2020 (at least until the next stimulus bill, or the one after that …).