The Coronavirus Aid, Relief and Economic Security Act (CARES Act) enacted on March 27, 2020, created incentives to make charitable contributions in 2020, especially for those that itemize deductions. The CARES Act increases the maximum 60% of Adjusted Gross Income (AGI) charitable contributions limit to a 100% limit for certain charitable contributions made in 2020. The higher 100% of AGI limit applies to “Qualified Charitable Contributions” as described below. In essence, charitably inclined individuals may be able to completely offset their taxable income for 2020, which opens the door for many other planning opportunities.
Under the CARES Act, the limit for Qualified Charitable Contributions is 100% of AGI. Qualified Charitable Contributions are defined as cash gifts to charitable organizations other than private foundations, supporting organizations and donor-advised funds. However, unlike the 60% of AGI limit under prior law, the 100% of AGI limit takes into account gifts of property subject to the 20%, 30% and 50% limitations (see chart at the end).
For example, if an individual makes a cash contribution equal to 30% of AGI to a donor-advised fund and 70% of AGI in cash to a public charity, then the taxpayer can deduct the 70% donated to the public charity. The contribution to the donor-advised fund does not count in determining the 100% limitation.
If an individual contributes property equal to 25% of AGI to a public charity and cash equal to 75% of AGI to a public charity, then the individual may deduct the full 100% of AGI.
Individuals contemplating significant charitable contributions in 2020 should recognize that full use of the 100% of AGI contribution limit will mean that a portion of the contribution will reduce income in the lower tax brackets. For example, a married couple will receive an average federal tax savings of approximately 20% on charitable contributions that reduce the last $326,600 of taxable income. The couple may consider deferring a portion of the contribution, or adopting another strategy, to maximize the tax benefit of the charitable contributions.
A married couple contemplating full use of the 100% of AGI contribution limit may also consider making a Roth IRA conversion. For example, if the couple with $2,000,000 of taxable income (before a Roth IRA conversion) makes a Qualified Charitable Contribution of $2,000,000, then makes a $326,600 Roth IRA conversion, the Roth IRA conversion would be taxed at an average federal tax rate of approximately 20%.
The higher 100% contribution limit for Qualified Charitable Contributions is elective, and a separate election is available for each contribution. If no election is made, then the contribution would be subject to the 60% of AGI limitation. Contributions in excess of the limitations can be carried forward for five years.
Individuals with IRAs should also consider a “Qualified Charitable Distribution” (QCD) from their IRA. The QCD rules allow IRA holders over age 70 1/2 to direct up to $100,000 to a charitable organization from their IRA. The QCD rules, like the new 100% of AGI rules under the CARES Act, require that the IRA funds be directed to charities other than private foundations, supporting organizations and donor-advised funds.The 100% contribution limit for Qualified Charitable Contributions is available only for 2020 and presents many interesting planning opportunities. Please contact Jay Kennedy, Jennifer Remondino, Sean Cook or your Warner trusts and estates attorney if you would like to explore these opportunities in more detail.
Under law prior to the CARES Act, charitable contributions have different limitations on AGI depending on the type of property and the type of charitable organization.
The limits may be summarized as follows:
|Type of Charitable Organization||Property||Contribution Limit|
|Private foundations||Appreciated long-term capital gains property (marketable securities only)||20% of AGI|
|Public charities||Appreciated long-term capital gains property||30% of AGI|
|Private foundations||Appreciated long-term capital gains property (marketable securities only) and cash||30% of AGI|
|General limit for cash and property gifts to all organizations||50% of AGI|
|Public charities, Supporting Organizations and Donor-Advised Funds||Cash||60% of AGI|