Critter Corner: Charitable Giving During the 2020 Tax Season

Dear Ernie and Jannette,

We want to support our favorite local charities and small businesses as much as we can while they are reviving themselves from all the changes in their business environments. We would like to give now, but are wondering if the CARES Act or the new landscape of Required Minimum Distributions change anything. Please let us know. Thanks so much for your help!

Shari Tubble

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Dear Shari,

We commend you on your giving spirit during these challenging times!

Congress, via the CARES Act, provided all taxpayers with charitable giving tax benefits, as follows:

  • For taxpayers who don’t itemize deductions on Schedule A, an individual will be able to take an “above the line” deduction of up to $300 for qualified charitable contributions. That means that the $300 directly reduces your taxable income and thus your total tax bill (while also benefiting charity)! Examples of qualified charitable contributions include:
    • Cash donations to 501(c)3 nonprofits – aka public charities
    • Cash donations and tithes to churches and religious organizations
    • Cash donations to veterans’ organizations
  • For taxpayers who itemize deductions on Schedule A, 2020 is a wonderful year to make cash donations to qualified charitable organizations. This is because individual taxpayers who itemize their deductions are typically not able to deduct more than 60% of their adjusted gross income (AGI) for cash gifts made to public charities. The CARES Act removes the 60% of AGI limitation for cash gifts to public charities from individuals during 2020 (i.e., itemizing individual taxpayers can offset up to 100% of their income in 2020 with contributions to eligible charities).

Do qualified charitable distributions make sense in a year without RMDs?

With a qualified charitable distribution (QCD), those age 70½ or older can distribute up to $100,000 directly from a traditional IRA to a qualified charity each year. QCDs can count toward your RMD and won’t be included in your taxable income. In this case, though, they can’t be counted as itemized deductions

Ordinarily, QCDs are a nice strategy for charitably-minded people, especially for those who don’t normally itemize deductions. In 2020, with RMDs waived, you could still execute a QCD. However, your taxable income wouldn’t be any lower than if you had just opted not to take a distribution. A QCD this year would, however, reduce your account balance, and therefore future RMDs for you and your beneficiaries.

The most tax-effective way to be charitable will depend on your circumstances. You may be better off contributing outside of retirement accounts, so that you may itemize deductions. Donating appreciated investments from a taxable account is often a tax-efficient strategy.

All things considered, not having to take large distributions from your retirement accounts for spending is a good position to be in this year. Consider talking to your tax professional to make the most of the situation. That can give you more ability to help out family, your community, or charities that matter to you in these difficult times.

Always remember that charitable giving is risky for people who may need nursing home care within five years. For more details, please read Mr. Farr’s article on this subject and see “Medicaid: The Perils of Gifting FAQ” on our website.

Hop this is helpful,

Ernie and Jannette

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