Merrick Shukan, CPA, MST and Mona Loong, MBA
12.21.20 | Client Alert
So far 2020 has been a tumultuous year to say the least, and many high-net-worth individuals are showing their support to nonprofit organizations in this historic time of need.
While many of us are familiar with traditional cash gifts to one’s favorite charity, there is a great deal more to understand when it comes to making charitable donations. As you plan for year-end charitable giving, understanding the charitable gifting provisions enacted by the CARES Act (The Coronavirus Aid, Relief, and Economic Security Act) should be considered. In addition, gifting appreciated assets to charity or making charitable gifts to a donor-advised fund have traditionally been excellent gifting strategies. When planning for 2020 charitable giving, donors should also consider the possibility of significant tax law changes under a new presidential administration that could in the future reduce the tax benefit associated with charitable deductions.
CARES Act- Enhanced Tax Deduction for Cash Donations
To help stimulate charitable giving in 2020, the CARES Act passed on March 27th, 2020, increased the adjusted gross income (AGI) limit for deducting charitable contributions from 60% to 100%. This added incentive allows donors to maximize the tax savings in connection with cash charitable contributions.
Key points to note regarding the CARES Act enhanced charitable deduction include:
- The ability to deduct qualified cash contributions against up to 100% of AGI applies only to cash contributions made during the 2020 tax year to qualified public charities.
- Contributions to a donor-advised fund or a private foundation, do not qualify for the enhance AGI deduction limit.
- Cash contribution carryovers from previous years continue to be subject to the AGI charitable deduction limits in place in the year of the original contribution.
For those that do not itemize deductions, the CARES Act provides a new “above-the-line” charitable deduction for up to $300 of cash donations to a qualified public charity. This is in addition to the standard deduction.
Donating Appreciated Stock
Gifting appreciated assets (stocks, bonds, mutual funds) that qualify for long-term capital gain treatment benefits both the donor and donee. The donor receives a deduction equivalent to the fair market value of the donated property and eliminates the capital gains tax that would otherwise be incurred from the asset appreciation.
Donating appreciated assets, instead of net after tax proceeds from the sale of the asset, results in a higher donation to the donee and a larger deduction for the donor. As an investor, if you are charitably inclined and also have “favorite” stocks that you wish to hold forever, consider donating some appreciated stock shares, and then buying new (replacement) shares of the same stock – effectively re-setting the cost basis. There will be no capital gain associated with the donation and the new/higher basis or the purchased shares may help reduce future capital gains.
For those individuals who have set up grantor trusts that hold appreciated securities, a SWAP power may be available, giving the grantor the ability to swap assets of the same value between their personal and grantor trust accounts. The SWAP power results in a broader selection of appreciated stock to choose from when donating to a charity.
Donor-Advised Funds (DAF)
A DAF can be thought of as a charitable investment account with the plan to donate the account assets over time to charitable organizations. The DAF is controlled by a sponsoring organization, that invests and manages the account assets. The donor cedes control of the assets but may recommend grants to qualified public charities. In practice, the donor’s recommendations are usually followed.
Some key points to note:
- Contributions to a DAF are irrevocable commitments and cannot be used for purposes other than grants to IRS-qualified public charities.
- The donor receives a charitable deduction for the full fair market value of contributed long-term capital gain securities in the year of the contribution.
- The assets may be invested and distributed to charities over time. This allows the donated property to potentially grow, making more money available for charities.
- Setting up a DAF account works well for taxpayers that are charitably inclined but have not yet identified the qualified charity recipient(s) and/or the timing of the distribution.
What to Expect in the Coming Year?
As President-Elect Biden is set to take the reins on January 20, 2021, we should be prepared for potential tax law changes, particularly if the Senate shifts to Democratic control. Biden’s tax proposals include a 28% cap on the tax benefit of itemized deductions, for those in a 28% or higher tax bracket. Additionally, Biden looks to restore the Pease Limitation (3% adjusted gross income limit on certain itemized deductions) for those with income above $400,000.
With the possibility of a cap on the tax benefit of itemized deductions and further curtailment of deductions through the Pease limitation, it may be advantageous to accelerate charitable contributions to the 2020 tax year. The relevant AGI charitable deduction limits should be discussed with your tax advisors when considering additional gifting for 2020.
Should you have questions or if you would like more information regarding the charitable planning concepts above, contact Merrick Shukan at 212.331.7670 | MShukan@berdonllp.com, Mona Loong at 212.699.8838 | MLoong@berdonllp.com or your Berdon advisor.
For more information on any other matter related to the COVID-19 pandemic, please contact your Berdon advisor and visit Berdon’s COVID-19 Information Center.
Berdon LLP New York Accountants