In December 2019 Congress passed the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), and in March of 2020, they made further changes by passing the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). These recent tax law changes may impact how you make donations to charities beginning in 2020.
With the increase in the standard deduction coupled with the limitation on state tax deductions that went into effect in 2018, it is no longer beneficial for many people to itemize their tax deductions. One way for taxpayers to benefit from a charitable contribution without itemizing, only available to individuals over age 70 ½, is to make qualified charitable distributions (QCDs) directly from their Individual Retirement Accounts (IRA). While utilizing the QCD does not create an itemized deduction for the charitable contribution, the distribution from the IRA is not taxable. Before the recent legislation, individuals over 70 ½ were required to take minimum distributions (RMDs) from their IRAs, and the QCD was a tax efficient way to make a charitable contribution. The net effect was to reduce their taxable income and still allow them to take advantage of the increased standard deduction. Even in a situation where the taxpayer itemizes their deductions, the use of the QCD results in a lower Adjusted Gross Income, which could result in other tax benefits. The maximum amount of QCDs is $100,000 per individual per year.
As a result of the SECURE and the CARES Acts, the age upon which IRA distributions are required was raised from 70 ½ to 72, and the requirement to take a minimum distribution was completely waived for the year 2020. The fact that RMDs may not be required for certain individuals does not impact the ability to make QCDs, since the tax law permitting these tax advantaged charitable contributions only refers to individuals over age 70 ½ regardless of RMD status. Therefore, a QCD may be made in this and future years by anyone attaining that age.
The SECURE Act also removed the age 70 ½ restriction for making deductible IRA contributions. However, you need to be careful in making IRA contributions over that age. The Act reduces the amount of QCDs that are excluded from taxable income by any deductible IRA contributions made for the year. If the deductible IRA is greater than the QCD in the current year, the reduction carries forward to future years. For example, if you made traditional IRA contributions each year from age 70 1/2 until age 73, and you made a QCD at age 74, the QCD would be reduced by these IRA contributions.
These tax law changes also made a few other modifications to the rules governing charitable contributions. The new law increases the deductible contribution limit to 100 percent of your adjusted gross income, up from the previous 60 percent, and corporations may now take a tax deduction for up to 25 percent of their taxable income, up from 10 percent. However, the more generous limits apply only to cash gifts to public charitable organizations. Donations to private foundations, donor-advised funds and gifts of stock or property are still subject to the old limits. For fiscal year corporations, only contributions made during the calendar year 2020 are eligible for the higher limits.
Finally, there is a new tax rule that individuals may deduct up to $300 of charitable contributions even if they do not itemize. That is up to a $600 “above the line” deduction for a married couple. However, if you do itemize your deductions, all charitable contributions must still be reported on your Schedule A-Itemized Deductions.
Clients are strongly advised to contact their E. Cohen tax advisor to learn more about these changes in tax law and how they might affect your business/personal tax situation. For additional info, please email us at email@example.com or call (301) 691-3600.