The coronavirus outbreak, the subsequent passage of the CARES Act by the federal government, and current low interest rates have changed the landscape of charitable contributions and planning in 2020.
The CARES Act changes the limitations on charitable giving to encourage individuals and corporations to make cash contributions to public charities.
- Above-the-line deduction. Under prior rules, individuals who do not itemize their deductions on their income tax returns could not take a charitable deduction for cash contributions to qualified charities. The passage of the Tax Cuts and Jobs Act of 2017 drastically reduced the number of individuals who chose to itemize deductions by (a) raising the standard deduction to $12,400 for single taxpayers and $24,800 for taxpayers that are married filing jointly, and (b) capping the deduction for state and local taxes at $10,000. The CARES Act adds a new above-the-line deduction that allows an individual who does not itemize to deduct up to $300 of cash contributions to a qualified charity. This is in addition to the standard deduction.
- Relaxed limitations on deductions for individuals. For individuals who choose to itemize, IRC Section 170(b)(1) limited the deduction for cash contributions to qualified charitable organizations to 60% of the individual’s adjusted gross income. Under the CARES Act, however, the deduction for cash contributions to a qualified charitable organization in 2020 is increased to 100% of the individual’s adjusted gross income. If the contribution exceeds the limitation, the individual can still carry forward and utilize the excess amount over the following five years.
- Relaxed limitations on deductions for corporations. Under prior law, corporate deductions for cash contributions to qualified charities were limited to 10% of taxable income. The CARES Act increases this limitation for cash contributions to qualified charities in 2020 to 25% of the taxable income of such corporation. The corporation can also carry forward and utilize any access amount over the following five years. In addition to the increase in the limitation for deductions of cash contributions, the limitation for deductions of contributions of food inventory by a corporation is also increased from 15% to 25%.
- Qualified charitable organizations. Cash contributions must be made to a public charity and cannot be made to a donor advised fund or private foundation.
The low interest rates that resulted in the wake of the coronavirus outbreak create an opportunity for individuals that are charitably inclined but also want to plan for future generations to utilize a Charitable Lead Annuity Trust or CLAT.
A CLAT is a trust that most often provides an annuity payment to a charity for a predetermined term of years. At the end of the term, the remaining assets can be used to fund a trust for the grantor’s family members. At the start, the grantor receives an income tax deduction based on the fair market value of the present interest of the annuity payments going to charity. The grantor also uses a small portion of his or her federal estate and gift tax exemption based on the remainder interest going to the trust for his or her family.
The historic low interest rates result in a higher income tax deduction providing an immediate benefit to the grantor. If the assets contributed to the CLAT outperform the estimated rate of return based on these low interest rates, the grantor’s family would also receive considerable assets while using minimal federal estate and gift tax exemption. This situation could be ideal for an individual who has a large income tax burden and was already considering providing for charities.
For individuals that are looking to make charitable gifts in 2020, the CARES Act and the current interest rate environment provide several options.