Enhanced Tax Benefits of Making Charitable Contributions This Year
The CARES Act, which was passed in March, increases tax incentives for making charitable contributions, some of which are only in effect for 2020. The community has done a great job of supporting Morristown Medical Center through the COVID-19 pandemic, however, the Growing Forward Campaign was announced late last year to expand and renovate three of Morristown’s centers of excellence: Gagnon Cardiovascular Institute, Goryeb Children’s Hospital and the Carol G. Simon Cancer Center. While the community has pledged more than $36.6 million, a gap of just under $2 million exists to complete the renovation and expansion projects.
Above the Line Tax Deduction
As a result of 2018 tax law changes, unless you have significant mortgage interest, you probably do not itemize your deductions. This means you would receive no tax benefit for donating to charity unless the donations were substantial or made as part of a specific tax planning strategy. The CARES Act provides taxpayers who do not itemize with a deduction of up to $300 for charitable contributions.
Unlimited Deduction for Cash Contributions
The deduction for charitable contributions is usually limited to a percentage of your adjusted gross income, with any excess carried to future tax years. For 2020 only, 100 percent of your cash contributions directly to a 501(c)3 charity is deductible. Donations through a Donor Advised Fund, private or community foundation are still subject to the usual deduction limitations. The idea is to get the money in the hands of charities. Gifts of appreciated securities to a charity are still subject to a maximum deduction of 30 percent of adjusted gross income with any excess carried to future years.
Donations from IRA Accounts
The CARES Act suspended the requirement that taxpayers over age 70.5 take a Required Minimum Distribution in 2020. Nonetheless, distributions directly to a charity from your IRA continue to yield significant tax benefits. No “deduction” is associated with such donations. However, in light of the nuances stated above concerning the need to itemize deductions and the income limitations on such deductions, this is not necessarily a bad thing. Donations from an IRA bypass these restrictions. Rather than getting a deduction, the withdrawal from the IRA is not included in taxable income, often yielding a better result.
Example: Before considering charitable contributions, your taxable income is $100,000, which includes a $10,000 withdrawn from an IRA. You do not itemize deductions.
You take the IRA distribution and then write a check to a charity for $10,000 – your taxable income remains at $100,000
You send the $10,000 from your IRA to the Foundation for Morristown Medical Center – your taxable income is $90,000
Speak to your tax advisor regarding any questions you may have on the above or other charitable planning techniques.