The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law in March 2020. The primary purpose of the CARES Act was to provide financial stimulus to individuals, families, and businesses. The Act also created a number of temporary tax and charitable giving benefits.
- The CARES Act created a $300 deduction for cash donations to qualified charities. This deduction is available to everyone – individuals who itemize their taxes and those who utilize the standard deduction.
- For individuals who itemize, the CARES Act moves the adjusted gross income (AGI) limit from 60% to 100%. The tax benefit can be spread out over a period up to 5 years.
- The CARES Act also increased the limit businesses can deduct from their taxable income for qualified charitable cash contributions from 10% to 25%.
- The Act waves required minimum distributions from 401(k) and IRAs for 2020. However; keeping these funds invested in your retirement plan may mean a large tax liability in subsequent years. If you do not need the funds to meet your living expenses this year, consider using your distribution for charitable giving.
- For those under age 59½ directly affected by COVID-19 (medical expenses related to illness or lost of livelihood) can withdraw up to $100,000 from your retirement accounts without paying the usual 10% early penalty (note – these withdraws are still treated as taxable income, meaning this could increase your 2020 tax bill or potentially push you into a higher tax bracket; however, the taxable income can be spread out over three years).
The CARES Act represents a significant opportunity for individuals to “bundle” charitable giving in 2020 to overcome the standard deduction. The tax benefits created by bundling these contributions can be utilized over a number of years, which could be particularly beneficial if the impact of the pandemic reaches beyond 2021 as many predict. Businesses also have an opportunity to have a greater charitable impact under these temporary rules. As always, LFA recommends individuals consult with their trusted tax advisers to determine the best opportunities for their unique situation.
If you are 70½ or older, there are important benefits you should know about – including some important changes – when considering charitable giving from your Individual Retirement Account (IRA) savings.
In December 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law. Prior to the SECURE Act, Required Minimum Distributions (RMDs) from IRAs began at age 70½, with distributions directly to qualified charities counting toward an individual’s RMD (up to $100,000). Distributions to qualified charities were not claimed as income, thereby avoiding income tax on the distributed amount.
The SECURE Act created the following important changes:
- The SECURE Act moved the age for RMDs from 70½ to 72 years of age (for those who were not 70½ before the end of 2019).
- Persons who turned 70½ after December 31, 2019 may still make gifts up to $100,000 to qualified charities from their IRA and avoid income tax on the distribution, even though their RMDs do not begin until age 72.
- To avoid income tax on IRA distributions to a qualified charity, the distribution must be made directly to the charitable organization. If the individual receives the distribution before it is passed on to the charity, income tax will be owed (this is not a change, but an important ongoing consideration).
- The age limit for IRA contributions has been removed, meaning individuals who continue working beyond age 70½ may now continue to contribute to their retirement savings.
- The SECURE Act removes a provision known as the stretch IRA, which had allowed non-spousal heirs to stretch out IRA payments over their lifetimes. Heirs now must receive a full payout of the IRA within 10 years of the original account owner’s death.
- The SECURE Act makes possible the use of tax-advantaged 529 accounts for up to $10,000 of qualified student loan repayments annually.
IRA assets remain among the most heavily taxed assets for heirs, while representing one of the most tax-efficient opportunities of beneficiary gifts to charities. You should always consult with your trusted tax adviser to determine the best opportunities for your unique situation.