The Covid-19 pandemic has had a tremendous negative impact on nonprofits across the country including Best Buddies. On March 27, 2020, Congress passed and President Trump signed into law the Coronavirus Aid, Relief and Economic Security (CARES) Act, which was a $2 trillion economic stimulus package to provide temporary relief to nonprofits.
The inclusion of an expanded and enhanced charitable giving tax incentive in the CARES Act is an acknowledgement that the work of nonprofits like Best Buddies is not only essential but critical. This is the only time in US history that Congress has passed this type of charitable giving in response to a disaster or national emergency.
We want to highlight some very important and beneficial features of this legislation specifically as it relates to corporate and individual giving.
Here’s How it Works:
The Individual Impact
Increase Charitable Deduction For 2020
Individuals that itemized their deductions on their personal income tax return (including couples filing joint returns) can now deduct up to 100% of their adjusted gross income (AGI). Under previous law, the deduction was limited to 60% of AGI. Effectively, taxpayers can eliminate their income subject to tax with charitable donations. For example, a couple with $100,000 in AGI may donate $100,000 to Best Buddies and eliminate their tax bill for 2020. Previously, the deduction would have been limited to $60,000 so the same couple would have paid tax on the remaining $40,000. This is a significant increase and potential tax planning idea for certain people. This deduction is only for gifts made directly to public charities such as Best Buddies. The old rules apply to donations made to private foundations or donor-advised funds (DAF).
New Deduction For 2020
For 2020, individuals and married couples who file jointly can deduct up to $300 per taxpayer ($600 for married couple) in annual charitable contributions as an above the line deduction. Thus, even if the individual or couple takes the standard deduction, this new law change allows for this adjustment. For example, if a married couple has $100,000 in income and takes the standard deduction, it can reduce its taxable income to $99,400 with a $600 contribution. To qualify for this deduction, the gift must be made directly to the charity. Donations made to a DAF do not qualify.
Corporate Giving Impact
Corporations may deduct up to 25% of their taxable income with a gift or donation to a charitable organization. Previously, this limit was 10%. Remarkably, a corporation that has $1 million of taxable income may reduce this by $250,000 with a gift or gifts to a qualified charity like Best Buddies. This is a real opportunity for businesses to increase their impact on the communities they serve by increasing their corporate giving in this critical time.
Giving Directly from IRA Accounts, Defined Benefit Pension Plans
For those individuals over age 70 ½ with IRA Accounts, the tax law requires minimum distributions from the account to start, which results in taxable income. Although this required minimum distribution has been suspended for 2020, it is still very good planning to consider making a direct charitable deduction from an IRA or Pension to avoid future taxable income. Taxpayers can direct up to $100,000 directly from their plan (Qualified Charitable Distribution or QCD) to reduce their taxable IRA or Pension balance. This will allow a non-itemizer to direct gift from their IRA to charities and received a larger tax benefit.
Please note, the information above is NOT legal or tax advice. Please consult an attorney or tax advisor for to learn more about how this impacts you or your organization.
J. Richard Huckaby, CPA
Warren Averett LLC