How the CARES Act changed charitable giving

A new deduction and higher deduction limits incentivize charitable giving for 2020

Even families that take the standard deduction on their tax returns can receive a benefit from donating to a qualified charity as a result of the CARES Act, a federal stimulus package passed in response to the COVID-19 pandemic.

The change was one among several in the act that affected charitable giving, but since approximately nine out of 10 households take the standard deduction – rather than itemize deductions – it is the one most likely to affect a larger number of American families.

For other families, and corporations, there are more reasons to pay attention to the charitable giving changes in the CARES Act, especially as Americans and businesses do their part to help others during this difficult period. 

Above-the-line deduction

Tax filers can now claim up to $300 of qualified charitable giving as an “above-the-line” deduction to their taxable income, meaning it can be taken on top of the standard deduction. Before the CARES Act, deducting charitable giving only made sense for tax filers whose total itemized deductions exceeded the standard deduction. Now, all tax filers can receive a tax benefit from donating.

How much the benefit is worth depends on your top marginal tax rate. If you have an adjusted gross income of $200,000, your top marginal tax rate would be 32%. Since you wouldn’t pay taxes on the income used to make a $300 qualified donation, it would only cost you $204 to make a $300 donation as you would have had to pay $96 in tax on that $300 income otherwise.

Is there a catch? No, but you do need to make the right kind of donation. The $300 deduction can only be claimed for cash donations made directly to qualifying organizations. Qualified charitable organizations are those which have been deemed tax-exempt by the IRS and are eligible to receive tax-deductible contributions. Donations made to donor advised funds, non-operating private foundations and support foundations cannot be claimed as part of this new above-the-line deduction.

Lastly, the $300 deduction limit is also the same for single filers and married couples filing jointly. That is, joint filers cannot claim up to $600.

Increased caps on charitable giving tax benefits

Another part of the law created to encourage charitable giving applies to tax filers who itemize their deductions. Before, filers could claim up to 60% of their adjusted gross incomes for charitable giving in a single year.

For example, if you had an adjusted gross income of $150,000 and donated $150,000 to a qualified charity, you could only deduct $90,000 of that donation. Now, you can deduct the full $150,000 if you donate in cash.

That limiter, “in cash,” is important. The maximum deduction for donations of appreciated assets remains bound by a 30% adjusted gross income limit. Also, donations made to a donor advised fund, non-operating private foundation or support organization do not qualify for the higher limit.

Corporate charitable giving

The CARES Act also increased the deduction limits for corporations, from 10% to 25% for cash donations. It also raised the deduction limit for “food inventory” from 10% to 25%. The many particulars of donating food and deducting its cost are beyond the scope of this post, but it’s worth talking to your tax professional if your corporation is in a position to help.

No changes to donations from IRAs

One area of charitable giving not changed by the CARES Act was qualified charitable distributions from IRAs. Though the act removed the impetus to make a required minimum distribution (RMD) for 2020, it made no changes to charitable distribution rules. You can, of course, still make a charitable distribution from your IRA.

Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.

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