Tax Law Changes Allow Year-End Charitable Planning Opportunities

As the end of the tax year approaches, it is worth spending a few minutes reviewing some of the changes that have been made in the tax laws surrounding donations to charities. In some cases, this guide will serve as a refresher regarding revisions made over the last few years, while in other cases there have been COVID-related changes that you may not be aware of.

Changes from The CARES Act

The most recent change – and one you might have missed – 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, but if you have the available cash, it is a one-time change to realize a significant benefit. Congress also is allowing limited 2020 cash donations for non-itemizers.

On the receiving end, qualifying trust-form charities that accept S-corporation stock may also want to encourage their donors to take advantage of this temporary allowance, as the tax liability that accompanies their sale can be balanced by an associated grant, which can be deducted by the donor.

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 does so without increasing your income while still allowing the donor to take advantage of the increased standard deduction.

Changes from The Tax Cuts and Jobs Act

And 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 quickly cut the number of people taking itemized deductions, effectively removing an incentive for charitable giving. With only 13.7 percent of taxpayers estimated to have itemized their 2019 taxes, many charities and tax professionals alike are encouraging taxpayers to bunch their donations into a single year every-other 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. For charities in trust, the act cut their unrelated business tax liability, allowing them to take a 60% deduction for cash contributions as well. This effectively offsets the amount they owe from donations of assets received in the form of debt-encumbered real estate, LLCs and partnerships, and S-corps.

Another change that the TCJA made to charitable giving involved an increase in the estate tax exclusion’s threshold to $11.58 million (the 2020 inflation adjusted amount) for a single taxpayer and double that for a married couple filing jointly. This will significantly reduce the number of estates that have to pay taxes and makes life insurance policies – meant to provide tax-free cash to heirs – a moot point. One solution to this problem is to designate qualified retirement plans, commercial annuities, IRAs and other tax-challenged assets as donations for charities and shifting asset allocation in a way that is more tax-advantaged.

Changes from The SECURE Act

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 ten 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 societal responsibility and our individual legacy, and when structured properly they can also offer tax advantages and other benefits. 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 us.