Charitable giving has changed under three recent pieces of tax legislation. The Tax Cuts and Jobs Act of 2017 (TCJA), the Setting Every Community Up For Retirement Enhancement (SECURE) Act and the Corona Virus Aid, Relief and Economic Security (CARES) Act all have some impact on the deductibility of charitable contributions.
TCJA increased the percentage limitation on the charitable deduction contribution base from 50 to 60 percent of an individual’s adjusted gross income (AGI) for cash donations to public charities in 2018 through 2025.
Under the CARES Act an above the line deduction has been added for cash gifts. This deduction amount is up to $300 per person and $600 for married filing jointly. The deduction is allowed even if the taxpayer uses the standard deduction. The temporary changes in the CARES act (applying only to 2020) also changed the AGI cap from 60 percent to 100 percent. The deductibility of gifts to 501(c)(3) private foundations remains at the AGI cap of 30 percent.
Qualified Charitable Distribution (QCD)
The SECURE Act became effective on January 1, 2020. Although the Secure Act raised the required minimum distribution (RMD) age from 70 ½ to 72, it did not impact the QCD age which remains at 70 ½. A QCD is a distribution made directly by an IRA custodian to certain qualified organizations. The QCD amount is excluded from taxable income while it counts towards satisfying an individual’s RMD. The total QCD for the year cannot exceed $100,000.
RMD funds may not be applied as a QCD to a donor-advised fund, supporting organization or private foundation.
Donor Advised Fund (DAF)
A DAF is a charitable giving vehicle that helps donors facilitate their giving. A donor creates an account and contributes cash, securities or certain non-publicly traded assets. Some of the advantages include an immediate income tax charitable deduction, tax-free growth of donated funds while the donor decides which charities to support, simple set-up, low costs and flexibility in timing of grants.
Name a Charity as the Beneficiary of your IRA
A qualified charity, including DAFs, can be an ideal beneficiary of an IRA. If you have both retirement and non-retirement assets, it may be more beneficial for a charity to receive the retirement assets and your heirs to receive the non-retirement assets. Since charities are excluded from paying income tax, they will receive 100 percent of the funds. Heirs would pay income tax on distributions.
Leave an IRA to a Charitable Remainder Trust (CRT)
The SECURE Act has a significant impact on retirement accounts. Prior to the SECURE Act, beneficiaries could stretch withdrawals over their lifetimes. Now most beneficiaries of inherited retirement accounts must withdraw the funds and pay the tax within 10 years. A CRT provides an immediate charitable deduction while providing an income stream to trust beneficiaries for a specified period. The remainder of the assets are donated to a designated charity. By leaving your IRA to a CRT, it allows the beneficiaries to receive withdrawals for longer than 10 years.
Charitable Lead Trusts (CLT)
One charitable giving method available that benefits both the donor and the charity particularly in a low interest rate environment is the use of a charitable lead trust. With proper planning it can provide the donor and family with many tax and estate planning advantages.
A CLT is an irrevocable trust that pays a defined income payment to a qualified charitable recipient for a period of time (the lead interest) and, at the conclusion of the term of the income payments, distributes the trust property to a remainder beneficiary designated. This remainder beneficiary can be the donor or a family member. The donor to a CLT claims a gift or estate tax deduction for the charitable lead interest. The donor may also be eligible for an income tax deduction if the CLT is a grantor type of CLT. In this case the donor would also be subject to income tax on the trust earnings during the term of the trust. Sales of appreciated assets inside the CLT, which is not a tax-exempt entity, do not escape capital gains taxation.
A couple of reminders/cautions……
Don’t overlook the use of appreciated securities in your charitable giving. This is a good way to avoid the capital gains tax while contributing and deducting the fair market value of the security given.
A charitable deduction is allowed only for a contribution made to or for the use of an organization formed in the United States or one of its possessions. A contribution made to a charitable organization created or organized under the laws of a foreign country is not deductible except as provided by a tax treaty between that nation and the United States. You may contribute to a US organization that uses funds for charitable purposes overseas. However, your contribution cannot be earmarked for the use of the foreign charity, or it will not be deductible.
Nancy Crowder-McCoy and Stephanie Murray are partners with the professional services firm Carr, Riggs & Ingram LLC, providing tax and estate planning services to high net worth individuals and families.