Giving More Than 60% of Income to Charity? CARES Act Says Deduct it

Bernie Kent, JD, CPA, PFS | April 7, 2020

Very few people have the ability and desire to give more than half of their income to charity—but there are some. Under the CARES Act, donors can get a Federal income tax deduction for charitable contributions of up to 100% of their Adjusted Gross Income (AGI).  This deduction can be enhanced by a Roth IRA conversion.

The Coronavirus Aid, Relief and Economic Security Act (CARES Act) was enacted on March 27, 2020. In order to encourage charitable contributions in 2020 (for any charitable purpose, not just contributions to charities related to the COVID-19 crisis) the CARES Act replaces the 60% of AGI charitable contribution limit with a 100% of AGI limit for 2020. This means that you can get a charitable contribution deduction for the full amount of your Adjusted Gross Income. Charitable contributions in excess of this amount can be carried forward for five years subject to the 60% of AGI limit in those years. The higher 100% of AGI limit applies to contributions made directly to charitable organizations, not to contributions to donor advised funds, supporting organizations or private foundations.

Congress is concerned about donors using donor advised funds, supporting organizations and private foundations to receive tax deductions without having any time requirement by which the funds have to be given to charitable organizations fulfilling a charitable purpose (other than accumulating charitable funds). The purpose of income tax provisions in the CARES Act is to encourage an immediate impact in the fight against COVID-19. This is why the 100% of AGI provision is limited to charitable contributions in 2020 and why it is unavailable for charitable contributions to charitable organizations that facilitate deferred charitable spending. Congress wants this additional allowable charitable contribution to be spent right away for charitable purposes, rather than be accumulated for charitable purposes in future years.

Charitable Contributions Limits

Charitable contributions have different limitations on AGI depending on the type of property (appreciated long-term capital gain property or other property such as cash) and the donee organization (private foundations; supporting organizations and donor advised funds; and any other public charity).

Charitable contributions have different limitations on AGI depending on the type of property (appreciated long-term capital gain property or other property such as cash) and the donee organization (private foundations; supporting organizations and donor advised funds; and any other public charity).

The limit for gifts of appreciated long-term capital gains property to private foundations is 20% of AGI.

The limit for gifts of appreciated long-term capital gains property to private foundations and public charities is 30% of AGI.

The limit for gifts of appreciated long-term capital gains property and cash to private foundations is 30% of AGI.

The limit for gifts of all the above and cash to supporting organizations and donor advised funds is 60% of AGI.

The limit in 2020 for gifts of all the above and cash to public charities (other than supporting organizations and donor advised funds) is 100% of AGI.

Gifts of appreciated long-term capital gains property to charities provide an additional tax benefit: there is no income tax payable on the long-term capital gain, yet you can still deduct the full fair market value of the gift. Charitable contributions to private foundations are eligible for the fair market value deduction only for contributions of publicly traded securities.

Charitable Contributions and Net Operating Losses

Charitable contributions of 100% of AGI may not receive a full tax benefit to the extent of any other itemized deductions of the taxpayer such as $10,000 of state tax deductions and deductible interest expense or medical expense. Such other expenses would result in a net operating loss which could not be carried forward or back due to the adjustments required for that purpose. In order to maximize the benefit of charitable contributions, you could limit qualifying charitable contributions to your taxable income after all itemized deductions (other than the charitable contribution deduction).

Election of 100% of AGI limitation

You can prevent the loss of the tax benefit of charitable contributions (described in the prior paragraph) by making multiple cash contributions in 2020. The CARES Act permits you to elect whether to apply the 100% of AGI limit to each qualifying contribution. Failure to make this election would convert such contribution to a 60% limitation contribution which could be carried forward for five years rather than be utilized in 2020 without providing any tax benefit.

Roth IRA Conversion

You can increase your AGI by converting an IRA (or other qualified retirement plan) to a Roth IRA. This will expand the income available for the 100% of AGI limitation. It offers the opportunity for very charitable donors who have an IRA to accomplish two goals at the same time: get an even larger charitable contribution deduction in 2020 and pay no federal income tax on the Roth IRA conversion. The Roth IRA results in tax-free growth, with no Required Minimum Distribution (RMD) requirement, rather than the tax-deferred growth and RMD for the IRA.

Example

Consider a taxpayer who has $1 million of AGI for 2020 and would like to make a $3 million charitable contribution this year. In prior years the income tax deduction would be limited to $600,000. For this year only, the CARES Act allows a charitable contribution deduction of $1 million. However, that would still leave a $2 million charitable contributions carryforward (subject to the 60% of AGI limit) in the subsequent five tax years.

If the taxpayer happens to have an IRA (or other retirement plan that can roll over to an IRA) with more than $2 million, they would be able to convert $2 million of the IRA to a Roth IRA, thus getting a full deduction for the $3 million contribution while at the same time eliminating the income tax on future earnings of the investments by converting to the Roth IRA.

Written by:

Bernie Kent, JD, CPA, PFS

Chairman, Schechter Investment Advisors // Senior Advisor

Bernie Kent is Chairman and Senior Advisor at Schechter Investment Advisors in Birmingham, Michigan. Previously, Bernie was the Midwest Regional Partner in charge of Personal Financial Services for PricewaterhouseCoopers LLP, where he advised more than 25 CEOs of New York Stock Exchange listed companies as well as 25 families with more than $100,000,000 of net worth.