COVID-19 has been a tragedy and a disaster. I can’t say any real good has come of it. In response to the crisis, Congress passed and President Trump signed the CARES Act.
Amongst the better known provisions (such as the $1,200.00 checks and the extra $600.00 weekly unemployment payments supplementing state unemployment payments) were a few charitable provisions. One of those provisions increased the charitable deduction limitation for qualified contributions. For 2020, it is possible to completely eliminate your tax liability through strategic charitable giving.
An Opportunity for 2020
For exactly one year, the CARES Act qualified contribution provision allows taxpayers to completely eliminate tax liability through charitable giving. The provision sunsets after 2020, at which time an individual’s deduction for charitable contributions will once again be limited to 60 percent of adjusted income (AGI). So if you are in a position to do so, consider increasing your 2020 charitable gifts to completely wipe-out your federal income tax liability.
A couple of rules to keep in mind. First, the 100 percent AGI deduction limitation only applies to (1) cash gifts that (2) are qualified gifts under the CARES Act and that (3) a taxpayer elects to treat as a qualifying gift. So what are qualifying gifts?
Generally speaking, a qualified gift is any cash gift to a publicly supported 501(c)(3) tax-exempt entity that is not for the purpose of funding a donor-advised fund account and for which the taxpayer makes an election to treat the contribution as a qualified contribution.
Note this does not mean that you cannot make a contribution to fund a DAF account. Rather, you can fund your DAF account under the old rules (up to 60 percent of your adjusted gross income with cash or a combination of cash and appreciated property) and also make qualified gifts to other publicly supported charities to reach the 100 percent limitation.
One thing to keep in mind – if you have deductions besides your charitable deduction, make sure to take this into account when figuring how to wipe-out your taxable income.
For example, if your gross income is $200,000, and you have $15,000 of deductions other than your charitable deduction, your AGI before the charitable deduction is $185,000. So total charitable deductions necessary to eliminate your taxable income are $185,000, not $200,000. If you should “over-donate,” you are allowed to carry the excess qualified CARES Act contribution to the next five tax years. So not all is lost.
The provision provides some great planning opportunities. One springing immediately to mind is mitigating the tax effect of converting a traditional IRA to a Roth IRA. Such conversions make lots of sense for many taxpayers, but they do generate taxable income in the year of the conversion. This year, and only this year, you can completely eliminate the tax associated with a Roth conversion using the CARES Act qualified charitable deduction.
A Final Note
Please consult with tax advisor prior to taking any actions with respect to the CARES Act qualified charitable deduction. Our preceding discussion was general in nature, does not take into account your facts and circumstances, and cannot be relied upon as tax advice. Read part 2 of this article here, where we dive deeper into the economic considerations of this tax law change.