The COVID-19 pandemic has had tremendous negative impact on nonprofits nationwide, and Bethesda is no exception. However, the CARES Act inclusion of an expanded and enhanced charitable giving tax incentive offers hope.
Important features of the CARES Act specifically relating to individual and corporate cash donations to qualified charitable organizations:
- If you itemize deductions on your income tax return (including married couples filing jointly), you may deduct up to 100% of your adjusted gross income (AGI), an increase from the previous limit of 60%.
- If you do not itemize your deductions, you can take up to $300 per taxpayer or $600 filing jointly, as adjustments to income on Form 1040.
- Corporations may deduct up to 25% of their taxable income, an increase from the previous limit of 10%.
This is the only time in history that charitable giving legislation has been included in response to a disaster or national emergency.
As a $2.2 trillion economic stimulus package that provides temporary relief from the economic fallout of the COVID-19 pandemic, the CARES Act recognizes the essential and critical work of nonprofits like Bethesda.
How CARES Act Affects Donations for 2020
Increases Charitable Deduction for Individuals Itemizing
If you itemize deductions on your income tax return, you can now deduct up to 100% of your AGI, which means you now could eliminate your income subject to tax.
For example, a married couple with $100,000 AGI could donate $100,000 to Bethesda (using their entrance fee, or cash equivalent) and eliminate their tax bill for 2020. Previously with the deduction limited to $60,000, the couple would have paid tax on the remaining $40,000.
This significant increase offers a potential tax planning strategy for many. The deduction applies only for gifts made directly to public 501(c)(3) charities, such as Bethesda. The old rules applied to gifts made to private foundations or donor-advised funds (DAF), of which Bethesda is neither.
Adds a New Deduction for Individuals Not Itemizing
If you do not itemize deductions on your income tax, you can deduct up to $300 per taxpayer ($600 for a married couple filing jointly) in annual charitable cash contributions, as an “above line” deduction (referencing lines 23-36 on Form 1040). Consequently, even if you take the standard deductions on your tax return, this new law allows for a tax adjustment.
For example, a married couple with $100,000 income who takes the standard deduction may reduce their taxable income to $99,400 with a $600 charitable contribution. To qualify for this deduction, you must make your gifts directly to the charity. Donations to donor-advised funds or private foundations do not qualify.
Increases Charitable Deduction for Corporations
Corporations may deduct up to 25% of their taxable income with donations to charities.
For example, a corporation with $1 million taxable income may reduce this by $250,000 with a contribution to a qualified charity, like Bethesda. This provides businesses with an incentive to increase their corporate giving, while having a significant impact on the communities that they serve during this critical time.
Changes to Gifts Directly from IRAs and Defined Benefit Pension Plans
For those individuals over age 70½ with IRAs, the tax law requires minimum distributions from these accounts, resulting in taxable income. Although this required minimum distribution is suspended for 2020, you may still want to consider making a direct charitable deduction from an IRA or pension to avoid future taxable income. You may direct up to $100,000 directly from a plan as a Qualified Charitable Distribution (QCD) to reduce your taxable IRA or pension balance. If you do not itemize your taxes, you still can direct a gift from your IRA to Bethesda and receive a tax benefit.
Note, the information above is NOT legal or tax advice. Please consult an attorney or tax advisor to learn more about how CARES Act may affect you or your organization.