Editor’s Note: The Coronavirus Aid, Relief, and Economic Security Act, or CARES, includes new tax provisions for making charitable contributions and withdrawing money from retirement plans in 2020. Beth O'Laughlin, a partner in the Holland office of Warner Norcross + Judd LLP, discusses several of those changes below. O’Laughlin focuses her practice on trust and estate planning and administration, succession planning, tax matters and wealth preservation. She works with young professionals, entrepreneurs, high net worth clients, and closely held and family businesses.
Q. What new tax benefits does the CARES Act offer to people who give to charity?
A. The act creates two new tax benefits for people who give to charities. First, it provides to taxpayers who do not claim itemized deductions on their tax returns a $300 deduction for charitable gifts. In other words, it allows individuals who take the standard deduction to take an above-the-line deduction of up to $300 for qualified charitable contributions.
Second, the act lifts the cap, created by the 2017 Tax Cuts and Jobs Act, on how much a donor can deduct in charitable gifts in a single year. Under that law, taxpayers may use certain cash contributions to deduct up to 60% of their contribution base, which is their adjusted gross income (AGI) before net operating loss carryback amounts. The excess is deductible in future years, subject to the percentage limitation. The CARES Act eliminates the cap for 2020. Thus, donors can deduct gifts equal to the full amount of their AGI this year. For businesses, the act also increases the limit on the deduction for charitable contributions from 10% to 25% of taxable income and, for contributions of food inventory, from 15% to 25% of aggregate net income.
Note that the increased limits apply to cash contributions only.
Q. Are there any restrictions regarding the charitable organizations to which qualifying gifts can be made?
A. Yes, to qualify for the new benefits under the act, gifts must be made to organizations described in Section 170(b)(1)(A) of the Internal Revenue Code, which, generally speaking, means public charities. The benefits will not apply to gifts made to donor advised funds or to supporting organizations (a specific type of public charity that carries out its exempt purpose by supporting other exempt organizations, usually other public charities). Gifts made to those organizations will invoke the old deduction rules.
Q. What if I made charitable gifts in 2020 BEFORE the act was adopted? Do the new rules apply to them?
A. Yes, the benefits of the CARES Act apply to all charitable gifts made during the 2020 calendar year.
Q. The CARES Act also includes several new provisions about retirement plans. Can you tell us about changes in required minimum distributions?
A. The Act waives all required minimum distributions (RMDs) for IRAs, 401(k)s, 403(b)s, and other tax-favored defined contribution retirement plans for the 2020 calendar year. This waiver includes RMDs not yet taken by those who reached age 70 ½ in 2019 and would have been required to take their first RMD by April 1, 2020. The act does not affect the provisions of the SECURE Act that delay the age at which RMDs start to 72 for anyone who did not reach age 70 ½ before Jan. 1, 2020.
Q. Can I still give directly to a charity from my IRA and have it count as a charitable contribution?
A. Yes, an individual who uses some or all of his or her RMD to make a gift to a charity as a qualified charitable distribution can continue to do so. The amount of the distribution will be excluded from income, as in past years.
The Mackinac Center is a public charity under Section 501(c)(3) of the Internal Revenue Code. Gifts to the Mackinac Center, including gifts made directly from IRAs, are tax-deductible to the full extent allowed by law.