As discussed in my recent post, the CAREs Act included a provision allowing an individual taxpayer to take a charitable deduction equal to 100 percent of one’s adjusted gross income (AGI), completely eliminating that taxable income for the 2020 tax year. The question is: does it make economic sense? The answer is: it depends.
Cannibalizing your 2021 charitable contribution? Perhaps a bad idea
As a rule of thumb, I would say no, if doing so causes you to cannibalize your next year’s (2021’s) charitable contributions. So, unlike the bunching strategy, which suggests you should pull-forward charitable gifts to increase your overall tax deductions over a two-year period, pulling forward charitable giving to 2020 to take advantage of the 100 percent AGI deduction, available only for 2020, may not make sense.
Example: Married Taxpayer has AGI of $500,000 before the charitable deduction. Taxpayer files as a married, and decides to donate $500,000 during 2020 (all cash, all too publicly supported charities), although Taxpayer usually donates $250,000 each year. In 2021, Taxpayer plans to make no charitable donations because they accelerated their 2021 giving into 2020.
Result: Taxpayer eliminates $128,089 in federal income tax liability for 2020. In 2021 (assuming no changes to the tax rules, more on that later), with the same AGI of $500,000, but no charitable deduction, Taxpayer owes federal income taxes of $128,089.
What if Taxpayer had stuck with a $250,000 charitable donation in each of year 2020 and 2021, rather than accelerating their 2021 charitable donation into 2020?
Result: In each year, 2020 and 2021, Taxpayer owes $48,042 for federal income tax, for total taxes of $96,084 – accelerating charitable giving to 2020 increases Taxpayer’s overall two year federal income tax bill by $32,005 – economically, a bad result.
Impact of Biden Tax Proposals
On the other hand, if Taxpayers believes the Biden administration may enact its proposed tax policies, retroactive to January 1, 2021, the result may not be quite so bad. Guessing at what the new tax brackets might look like, and assuming enactment of the proposed 28 percent benefit limitation for itemized deductions, if Taxpayers sticks with their $250,000 donation in each of year 2020 and 2021, rather than accelerating 2021 charitable donation, under the Biden rules their 2021 income tax might be $59,642.
This occurs because we are taking into account Biden’s proposal to limit the benefit of itemized deductions to 28 percent. Since we haven’t seen how a Biden administration would implement this proposal, this is just a guess. If we are correct, however, Taxpayer’s combined income tax bill for 2020 and 2021 increases to $107,684 (if the existing rules stay in place) . Note that even under assumed Biden rules, economically Taxpayers are still worse off by $20,405 if they accelerate their 2021 giving to 2020.
Tread Carefully – Tax Rules and Associated Economics Require Careful Analysis
Tread carefully when making tax decisions! Be sure to speak with your tax advisor prior to taking any action. We present information on the tax law for educational purposes only. We don’t offer tax advice specific to your individual facts and circumstances, and you should never make important financial decisions without discussing the potential outcome with your legal and tax advisors.