CARES Act Highlights: Charitable Giving Tax Breaks

We’ve all heard about the Coronavirus Aid, Relief and Economic Security Act, or CARES Act, mostly because of the direct payments many Americans will receive. However, even if your income is too high to get a direct payment, there are at least some interesting parts of it you should know about it.

We’ll start optimistically, hoping that you still have your job and are able to make some of these money moves. The CARES Act is correctly planning for a negative impact in charitable giving, so now they’ll allow a $300 above the line deduction for an individual.

To be eligible, you must take the standard deduction, which increased substantially in 2018 and stands at $12,400 for single filers and $24,800 for married filing jointly in 2020. Before this new law, you could only deduct charitable contributions if you itemize, so this will be a new opportunity for the nearly 60% of households who take the standard deduction.

Things get a little more challenging when you try to figure out if “Married Filing Jointly” can receive two $300 charitable deductions, for a $600 total deduction. Here’s the way the law is written:

The key phrase is “by an eligible taxpayer”. Based on this and what many nonprofits are already claiming, married filing jointly can in fact deduct the $600 above the line. However, consult your tax professional, which I’m doing and will update when I get their answer.

Let’s take a look at how this above the line deduction will impact your tax bill. As this is a tax deduction and not a tax credit, this $300 (or $600) will be deducted from your gross income, effectively removing that amount of money that was previously planned on being taxed.

The impact is higher as you move up the income ladder and tax brackets. If you’re in the 22% tax bracket (up to $84,200 for single or $168,400 for married filing jointly), your $300 above the line deduction will result in $66 in tax savings, or $132 for the full $600 giving.

This isn’t exactly an ultra-wealthy type tax loophole, but it’s a nice kicker if you’re already donating money to a qualified organization. It’s also important to note this applies to cash donations only, not stock or property donations.

Don’t worry, if you itemize your deductions instead of taking the standard deduction, there’s also changes in the CARES Act that can impact your giving. The CARES Act temporarily increases the total amount you can deduct from 60% of your Adjusted Gross Income (AGI) to 100% of your AGI!

This is huge, but it can be hard to explain. This will benefit people who are giving major donations to qualified organizations, as previously you’re limited on how much of the donation you can use to offset your taxes, but now you can essentially fully offset your taxes.

Let’s walk through an example to explain. Let’s say the Smiths are retired and have an income of $80,000 per year from social security, dividends and a pension. They want to maximize their giving and last year they gave $80,000 cash to charity and could claim a $48,000 deduction ($80k X 60%), still owing taxes on the remaining $32,000 of income.

If they make the same $80,000 donation this year, they can now claim a full $80,000 deduction, which would take their AGI down to $0, and pay no taxes on their income for the year.

There are important considerations like making sure it’s a qualified charity and it can only be a cash donation, this doesn’t apply to stock or property donations, which still stand at their previous deduction levels. Also, the donation must hit this year, and you can’t donate through a Donor Advised Fund (DAF).

One other consideration is this can be used to offset the income generated when converting a qualified IRA to a Roth IRA. This can all get complicated pretty quickly, so make sure to consult a qualified tax professional if considering any of these moves. I also found this Forbes article very informative.

This is the kind of “fun” stuff I get excited about with financial planning, if you have any questions on the CARES Act, let me know.