The recently passed Coronavirus Aid, Relief, and Economic Security (CARES) Act in response to the COVID-19 crisis is predominantly known for its PPP (Payroll Protection Program) through the SBA (Small Business Administration).
Receiving much less attention are the provisions that increase the tax-deductibility of charitable donations. These changes could help many nonprofit charitable organizations that are suffering.
The 2017 tax reform bill effectively doubled the standard deduction for individual and joint taxpayers. One of the most significant consequences was that the percentage of taxpayers who itemize their deductions went from approximately 35% to less than 10%.
A lot of taxpayers saw their effective tax rate reduced as it also resulted in the fact that the majority could no longer write off charitable gifts. (My guess is this was an intended consequence that ended up hurting individual taxpayers as well as charities).
The CARES Act creates two provisional changes to the tax treatment of charitable donations. One will mostly benefit low to middle-income taxpayers, and the other will benefit a handful of high-income donors while motivating larger donations to charity.
The New Donor Benefits:
- Universal Deduction for Donations Up to $300
For the majority of taxpayers who lost the ability to itemize their charitable deductions, the CARES Act will allow you to deduct donations to charity up to $300.00 on your 2020 federal Form 1040 tax return. This is in addition to your standard deduction. Married-filing-jointly taxpayers will receive a deduction of up to $600.00.
- Further Boosting the Cap on the Charitable Giving Deduction
For those donors able to itemize their deductions, and directly write off charitable gifts, the current deduction cap is 60% of adjusted gross income (AGI) for giving to a 501(c)(3) public charity.
The CARES Act lifts the caps to 100% of adjusted gross income (AGI) for individuals and joint taxpayers, while corporations will see their cap lifted to 25% for 2020 tax year. These are significant changes to the tax treatment of charitable donations and for certain individuals. It could theoretically lead to zero income tax if you make a huge donation.
For example, if Jane Doe Taxpayer has an AGI of $180,000, she would normally be able deduct up to $108,000 for charitable giving. With the temporary changes in the CARES Act, Jane Doe could now deduct up to her full AGI of $180,000 if she gives that much to charity in 2020.
There has been expected criticism of these changes. Some have even complained that the limit for standard deduction filers is too low at $300.00 per individual. Others have screamed that the primary beneficiaries will be the rich donors.
What can anyone really say at this point? Such unintended consequences should be expected when any legislation is scarcely debated and passed in just a few days.
Interestingly, few media outlets have reported on this aspect of the CARES Act. For this reason, I believe it is mandatory that charities give their donors notice immediately and repeatedly through the remainder of the year. This giving opportunity ends on December 31, 2020.
The bottom line is these changes will be significant for certain charities and are surely to motivate big donors to make a difference.