Congress Blows the Deduction Lid Off Cash Charitable Contributions Made During 2020 and Encourages Smaller Contributions
By: Robert S. Schwartz, Esq.
April 21, 2020
The Coronavirus Aid, Relief, and Economic Security Act (the “Act”) became law on March 27, 2020. The Act is mainly targeted toward many of the adverse effects of coronavirus. But the Act also contains non-targeted sections of broader import. Act Section 2205 provides for a calendar year 2020 maximum federal charitable income tax deduction equal to 100% of a single or joint Form 1040 filer’s 2020 adjusted gross income. This limit for qualifying cash contributions will revert to 60% in 2021 through 2025 and then revert to its long time maximum of 50% of adjusted gross income. What does this mean for wealthy families inclined toward substantial annual charitable giving or who may be inclined towards a one-off substantial charitable contribution in 2020? Each situation is different, but a number of general observations and illustrations can be made.
If 2020 cash gifts to “qualified charities” made directly by an individual, and/or made indirectly as a share of partnership, limited liability company or S corporation cash gifts, total up to 2020 Form 1040 adjusted gross income, adjusted gross income is $0.00. Consequently, 2020 “regular” federal income tax liability is $0.00, although the federal “alternative” income tax is another thing. Yet for 2020, qualifying charitable contributions can reduce “regular” income tax liability to $0.00. This is a phenomenon nonexistent since 1970. If it should happen that 2020 cash gifts to “qualified charities” exceed 2020 Form 1040 adjusted gross income, the excess amount flows into the long-standing up to five-year charitable deduction carryover allowance and limitations that historically have been the subject of advanced tax planning techniques.
For contributions by checks, one is well-advised to insist that the qualified charity cash the check during 2020, although proof of USPS mailing before January 1, 2021, suffices. In the case of wire transfers, obviously, the wire transfer has to be confirmed as completed before 2020 year-end. With credit and debit cards, the debit date is what counts. Qualified charities consist of charitable organizations such as churches, non-profit hospitals, universities and museums, and non-profit public welfare agencies like the Red Cross. Whatever is the character of the non-profit organization’s purposes and activities, as well as the basis for its federal tax-exempt status under 501(c)(3), the key is that it qualify as a public charity. Charitable family private foundations do not qualify, except for the relatively rare private operating foundations, like the Bill and Melinda Gates Foundation (most likely), and rarer private conduit foundations. Conduit foundations, in general, distribute any and all contributions received during a fiscal year to public charities or the needy no later than the 15th day of the third month after the end of the fiscal year. Section 2205 clearly disqualifies cash contributions to donor-advised funds, existing or newly established in 2020.
A further requirement is that 2020 Form 1040 filers specifically elect Section 2205 application to their 2020 cash contributions to qualifying charities. Presumably the IRS will be promulgating a special tax form, or alternatively, it will be adding to an existing charitable deduction form. If not, then a homemade “Section 2205 Election” will need to be attached to Form 1040.
An individual need not, but may be in a position to, eliminate his or her federal income tax liability for 2020. For example, if a married couple without dependent children is expecting adjusted gross income of $650,000 during 2020, and together make qualifying cash contributions of $450,000 to their favorite public charities (and elect Section 2205), 2020 taxable income equals $200,000. Since other itemized deductions are allowed beyond that for cash contributions to public charity, as augmented by Section 2205, such as a maximum of $10,000 for state income taxes, regular taxable income can be reduced below $200,000. Assume that our couple’s regular taxable income is $190,000. The regular income tax is $33,759. The alternative minimum income tax is below that at $22,516, so it is not a relevant consideration. Assuming qualifying cash contributions of $550,000, regular tax is $11,380; alternative minimum tax of $22,516 is above that. 2020 federal income tax becomes $22,516.
Note that it has historically been the case that the “AMT” dilutes the income tax efficiency of large amounts of charitable giving anyway. Section 2205 presents a tax planning scenario of gifts close to an AMT threshold. Further possible considerations include the size and degree of likelihood of use against regular income tax in later years of a regular income tax credit arising from having paid the AMT in 2020 on account of a Section 2205 election. Obviously, as has been the case for decades with respect to taxpayers with large amounts of income and deductions, planning to reduce (or eliminate) 2020 income taxes by utilizing Section 2205 will be an art, not an exact mathematical equation.
Meanwhile, for a far greater number of 2020 Form 1040 filers, Act Section 2204 provides for an up to $300 charitable deduction for 2020 cash contributions to public charities. Additional requirements are that these contributions be made directly by individuals who will not be itemizing deductions on their 2020 federal income tax returns. There is no tax election required, but as with all charitable deductions, a contributor should retain records, like a copy of a check cashed by a charity during 2020. Since public charities are widespread and many are well-known, such as all bona fide churches, the one-time Section 2204 deduction is easily achieved if a family has the available funds.
The experienced attorneys at Herold Law, P.A., can be of service to you if you find yourself attracted to Section 2205’s incentives to charitable giving, but value income tax efficiency as well. Among them is Robert S. Schwartz, Esq., who may be reached at 908-679-5011 or contacted at [email protected]. For more about charitable tax planning see, Robert S. Schwartz, An Overview of Planned Giving, Taxation of Exempts, January/February 2018, Vol. 29, No. 4 (Thomson Reuters).