What Do Your Charitably Minded Clients Need to Know About the CARES Act and the SECURE Act?
The CARES Act, or The Coronavirus Aid, Relief, and Economic Security Act, was signed into law and became effective on March 27, 2020.
The SECURE Act, or The Setting Every Community Up for Retirement Enhancement Act of 2019, was signed into law on December 20, 2019 and became effective on January 1, 2020.
You may be wondering how these new laws affect your charitably minded clients.
As you know, the CARES Act was enacted as part of the effort to address the economic impact of the COVID-19 pandemic. The CARES Act includes some provisions that encourage charitable giving. Here are five major philanthropy related points your clients need to know about this act.
- New 100% of AGI limit available in 2020 for cash gifts to most public charities. For the 2020 tax year only, your clients may elect to apply a new 100% (rather than 60%) of adjusted gross income (AGI) limit to cash gifts to public charities. Please note that gifts to donor advised funds (DAFs) or supporting organizations (SOs) are not eligible for this special election.
Given this ability to deduct up to 100% of their AGI, this may be a good time for donors, especially those who typically exhaust their usable charitable deduction in a given year, to accelerate payment of existing pledges to their favorite charities or to increase their giving to areas of need in these uncertain times. Clients who make this election can carry forward any unused portion of the deduction for a period of up to 5 years. Note, this carryforward will be subject to the normal 60% of AGI limit.
It’s important to remember that if your clients make gifts of both cash and appreciated assets in 2020, there is a complex interplay between charitable contribution limits based on asset type. This is especially true for donors who have a charitable deduction carryforward from 2019 or earlier.
- Non-itemizers are eligible for a $300 above-the-line charitable deduction to public charities. Most likely for the 2020 tax year only, a reduction in taxable income is available for your clients who do not itemize their deductions. It is an “above-the-line” adjustment to income that will reduce your client’s AGI and thereby reduce taxable income. This adjustment is available for cash gifts to public charities only and is limited to $300 per taxpayer or tax filing unit. (We believe that the deduction for married couples is limited to $300.) Again, please note that this deduction is not available for gifts to DAFs, or SOs.
- Limit on cash contributions from corporations increased to 25% in 2020. The taxable income limit that applies to cash contributions made by corporations to “public charities” (again, except DAFs and SOs) is increased from 10% to 25%. The usual 10% limit still applies to other charitable contributions by corporations, and those contributions reduce the 25% limit dollar-for-dollar. Qualified cash contributions in excess of the 25% limit can be carried forward for up to 5 years under the usual limits. This change may encourage more corporate giving than would have otherwise occurred this year.
- Limit on contributions of food inventory increased to 25% in 2020. The limitation on deductions for contributions of food inventory by any trade or business is increased from 15% to 25%. This change will most likely encourage more food donations from businesses.
- Relief from the Required Minimum Distributions in 2020. RMDs are waived for IRAs, including inherited IRAs, and other qualified retirement plans such as 401(k) and 403(b) plans.
Enacted in late 2019 (which seems like ages ago now) to encourage more retirement savings, the SECURE Act changed several rules related to IRAs and other retirement plans. Here are a few major points that your clients need to know related to charitable giving.
- The age of Required Minimum Distributions (RMDs) increased from 70.5 to 72. Your clients who turned 70.5 in 2019 will be subject to RMDs, but those who turn 70.5 after January 1, 2020 won’t be subject to RMDs until they turn 72 (2021 at the earliest). (And, of course, anyone turning 72 in 2020 will have already been subject to RMDs because they’d turned 70.5 a year and a half earlier, when that was the minimum age.)
- QCDs may still be a win-win for your clients. After 2020, RMDs, especially for IRA holders with balances of $400,000 or more, could have negative financial implications (including raising Medicare premiums). In the future, taxpayers looking to reduce their tax exposure could find QCDs even more appealing than in previous years.
Please Note: For your clients who are not yet retired and are still making deductible IRA contributions, there are new limitations applicable to their QCDs.
- Clients 70.5 years old or older are still QCD eligible. While the SECURE Act changed the minimum age for RMDs (and the CARES Act eliminated RMDS for 2020), the minimum age for QCDs did not change. Some of your clients may not feel any urgency to withdraw funds from their IRAs this year. However, making a QCD before turning 72 could be a tax savvy move for clients with large IRA balances because it may lower their future RMDs.
- Clients may be more open to leaving their IRAs to charity. The SECURE Act also eliminates the “Stretch” IRA, which previously allowed non-spouse inheritors of IRAs to take distributions over the course of their anticipated life expectancies. Now, many IRA inheritors are required to take full distribution within 10 years, which could increase their tax bills. To avoid this possibility, IRA holders may wish to pass on different assets to their loved ones while designating their favorite charities as beneficiaries of their IRAs.
Another option for your charitably minded clients may be to establish a Testamentary Charitable Remainder Trust (CRT), and to name that irrevocable trust as the IRA’s beneficiary. The testamentary CRT can then disburse income to the trust beneficiaries for the life of the beneficiaries or a term of years not to exceed 20 years before the remainder passes to charity. Additional benefits include: no income tax when the CRT is funded, tax-free growth within the trust, and income tax applied to beneficiary payments only.
For any questions or comments on this article, please contact us at 800.200.0575 or firstname.lastname@example.org.