2020 has been a very challenging year in so many ways. Millions of people have been affected directly by the Coronavirus and millions more have been negatively impacted by the economic restrictions that have been in place to limit the spread of the virus. Still, others have suffered due to a series of natural disasters including hurricanes, tornados, and the wildfires in the West. Meanwhile, many charities that are normally on the front lines to support people in need have suffered due to the challenges related to raising money in a world where social distancing and travel restrictions make it more difficult to hold fund raising events. This may make 2020 an extremely important year to support favored charities to make sure that the charity is able to survive the pandemic and continue to pursue their mission. Fortunately, there are a number of provisions that can allow individuals to give in financially intelligent ways.
Taxpayers over age 70.5 may find that they can benefit from donating money from their IRA directly to charity. In this case the money donated to charity will not be included in the taxpayer’s taxable income creating a direct tax benefit that is not dependent on the taxpayer’s other deductions or credits. Using an IRA to make charitable donations may not only create a tax benefit for the year of the donations but may also reduce the amount of the owner’s Required Minimum Distributions (RMDs) in future years which may reduce future tax liability as well.
Given the rebound in stock values from the March lows, this may be a good year to donate appreciated stock to a charity. When an appreciated asset which has been held for longer than one year is donated to charity the donor is allowed to take a tax deduction for the value of the gift. The donor is also able to avoid the taxation that would have resulted had they sold the asset as the unrealized gain will not be subject to taxation. This is often referred to as the double tax break which can be very attractive to investors who have assets that have substantially increased in value and would otherwise be subject to a large tax liability.
For those looking to make smaller donations, the CARES Act allows a special deduction of up to $300 which does not require that the taxpayer itemize their deductions. This can be benefit to taxpayers who claim the standard deduction and therefore would otherwise not receive a federal tax benefit from donating to charity. $300 may not seem like much but it creates an incentive for many lower and middle-income taxpayers to give some money to charity in 2020.
For those who may be in a financial situation to make large contributions the CARES Act has increased the amount a taxpayer can deduct from their income. In the past, taxpayer’s charitable contribution deductions were limited to 60% of their adjusted gross income. Any amount over and above that amount was carried over to the following tax year. In 2020 taxpayers may claim a charitable deduction equal to 100% of their Adjusted Gross Income.
Lastly, 2020 may provide a unique opportunity to supercharge the impact of charitable contributions. Many organizations are offering matching funds to help organized charities raise money to support their cause. This could mean that a donation made in 2020 is matched dollar for dollar or even two or three dollars for every dollar donated. This can allow even small donors to make a large impact.