The Coronavirus Aid, Relief, and Economic Security (CARES) Act includes four changes to the rules for charitable income tax deductions:
Individual taxpayers who take the standard deduction are allowed an “above the line” charitable income tax deduction equal to the amount of charitable cash gifts, but only up to $300. Although not specifically addressed in the CARES Act, it is reasonable to assume that each spouse of a married couple should be allowed to each claim a separate $300 deduction (for a total of $600).
Eligibility only extends to those individuals who claim the standard deduction (and do not itemize). The deduction is limited to contributions of cash and does not include contributions to a supporting organization, a donor advised fund, or non-operating private foundations. It also does not include any carryovers of excess charitable contributions from previous years. This provision is a permanent change.
For contributions of cash paid to charitable organizations in calendar year 2020 (and 2020 only), individual taxpayers who itemize are allowed to elect to claim a charitable income tax deduction up to 100% of adjusted gross income (AGI), computed without any net operating loss carryback to the taxable year.
Taxpayers have to elect to use the provision. Taxpayers may opt to not make the election if otherwise the usual provisions would carry over the deduction into a future year where the value of the deduction may be larger because it can be claimed against income subject to higher tax rates. This provision also applies to charitable contributions made by partnerships and S-corporations where the charitable contribution is then allocated to individual taxpayers.
This provision does not apply to contributions to a supporting organization, a donor advised fund, or non-operating private foundations. Contributions in excess of a taxpayer’s AGI is carried over for five years (and will be subject to the current 60% AGI limitation on cash gifts in future years).
The CARES Act requires that this amount is “paid in cash during the calendar year 2020 to an organization.” It is unlikely that a donor who contributed cash to a charitable remainder trust could claim the higher AGI limit. It is arguable that a donor who contributes cash to an eligible charitable organization in exchange for a charitable gift annuity would be eligible for the 100% AGI limit, but this is unclear.
For contributions of cash paid to charitable organizations in calendar year 2020 (and 2020 only), a corporation can claim a charitable income tax deduction up to 25% of the corporation’s taxable income. This provision does not apply to contributions to a supporting organization, a donor advised fund, or non-operating private foundations.
This provision applies to C-corporation taxpayers (corporations that pay their own income taxes). S-corporations that make charitable contributions allocate these deductions among their shareholders and the shareholders can claim a deduction on their own personal income taxes.
For contributions paid in calendar year 2020 (and 2020 only), the limitation on charitable income tax deductions for food contributions is increased to 25%:
As background, contributions of inventory property related to the donee organization’s exempt function and for the care of the ill, needy, or infants is not subject to the general rule that the contributor only receives a deduction for tangible personal property equal to basis. Taxpayers are generally permitted to take a charitable deduction for a donation of food inventory to a charitable organization. The deduction is limited to the lower of:
For tax years after 2017, the Tax Cut and Jobs Act of 2017 (Public Law No. 115-97) substantially increased the standard deduction for both individual and married taxpayers (and also limited some itemized deductions). This meant that many taxpayers who previously itemized now find it more advantageous to claim a standard deduction and, because of this, had no marginal tax incentive to make charitable contributions. Charitable organizations have been concerned that the change, which eliminates the tax incentive to make a charitable gift for many individuals, will lead to a decrease in the amount of charitable contributions.
The new provision is a first step to addressing this. As noted above, for taxable years beginning 2020, a taxpayer who takes advantage of the standard deduction may take an above the line charitable deduction of up to $300 ($600 for a married couple). The “above-the-line” deduction means that it can be deducted from income even if the taxpayer claims the standard deduction. Charitable organizations are hoping that the $300 limitation will increase or be eliminated in the future.
A taxpayer’s charitable deduction is subject to an overall limitation based on the taxpayer’s adjusted gross income. This limitation depends on whether the recipient organization is a public charity or a private foundation and the type of property contributed. To the extent a taxpayer has a charitable deduction in excess of the applicable AGI limitation, the amount can be carried forward for five years.
Below please find a chart with a summary of the AGI limitation. The AGI limitation rules can be difficult to apply:
The chart below shows the AGI limitations for 2020.
|Public Charity, Supporting Organization, & Private Operating Foundation||Private Foundation|
|Type of Property||Deductible Amount||Deduction Limitation as a Percentage of AGI||Deductible Amount||Deduction Limitation as a Percentage of AGI|
|Cash Contributions||Amount of Cash||100% if to a public charity other than a supporting organization or DAF*||Amount of Cash||30%|
|60% if to a supporting organization or a Donor-Advised Fund*|
|Ordinary Income Property||Cost Basis||50%||Cost Basis||30%|
|Short-Term Capital Gain Property||Cost Basis||50%||Cost Basis||30%|
|Long-Term Capital Gain Property (other than tangible personal property)||FMV||30%**||Qualified Appreciated Stock: FMV||20%|
|Long-Term Capital Gain Property / Tangible Personal Property – Property is Related Use||FMV||30%||All other LTCG Property: Cost Basis||20%|
|Long-Term Capital Gain Property / Tangible Personal Property – Unrelated Use||Cost Basis||50%|
*See discussion above.
**Taxpayers may elect to claim a deduction equal to cost basis in exchange for using the 50% limitation.
For a summary of tax provisions in the CARES Act, click here.
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