The Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 is an estimated $2 trillion package. In this series, we will discuss four of the most notable provisions for individuals and families.
The CARES Act includes a new above-the-line deduction for Qualified Charitable Contributions made to eligible charities.
As with many things, when it comes to taxes, there is both good news and bad news. The bad news is that the deduction, which is effective for tax years beginning in 2020, is limited to $300. Even for a taxpayer in the highest tax bracket of 37%, that still ‘only’ amounts to an actual tax-bill-savings of $111. Every little bit helps, but it’s hardly going to be a windfall for anyone, as a taxpayer in the 12% bracket will only get $36 of tax savings.
The good news, though, is that although the impact on an individual basis may not amount to much, a more substantial number of people will be able to take advantage of this benefit. That’s because in order to claim the deduction, a taxpayer cannot itemize deductions on their Federal return. But thanks to the recent near-doubling of the standard deduction only about 10% of taxpayers today actually itemize deductions on their Federal return… which means about 90% of taxpayers can potentially benefit from this new tax break in at least some way!
Notably, Qualified Charitable Contributions must be made in cash. And they cannot be used to fund either donor-advised funds (DAFs) or 509(a)(3) “supporting organizations.”
The CARES Act temporarily increases the AGI (Adjusted Gross Income) limit on cash contributions made to charities from a maximum of 60% of AGI (previously increased from 50% by the recent tax law changes), to a maximum of 100% of AGI for “qualified contributions.” As such, an individual can completely wipe out their 2020 tax liability with charitable contributions. If total charitable contributions exceed the 2020 100%-of-AGI limit (once a taxpayer has brought their 2020 income tax liability to $0), the excess may be carried forward as a charitable contribution for up to 5 years.
Like Qualified Charitable Contributions, this provision expressly prohibits such contributions from funding either donor-advised funds (DAFs) or 509(a)(3) “supporting organizations.”
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