One sure way to save on one’s federal and state income taxes is to make charitable contributions to qualifying organizations.
In past years, the only individuals who could make tax deductible charitable contributions were those individuals who itemized (filed Schedule A) on their federal income tax returns. But with the passage earlier this year of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, all individual tax filers can make potentially tax-deductible charitable contributions.
This column discusses the provision coming out of the CARES Act that allows all individuals including federal employees and annuitants to make qualifying charitable contributions for 2020, thereby reaping some federal and state income tax savings for 2020.
Also presented in the column are what federal employees and annuitants have to do between now and December 31 with respect to making potentially deductible tax-deductible charitable contributions and save on their 2020 tax bill.
The CARES Act passage resulted in the following expanded ways in which individuals can deduct charitable contributions in 2020:
1. Previously, charitable contributions could only be deducted on an individual’s federal income tax return if the individual itemized his or her allowable deductions (filed Schedule A as part of Form 1040)). An individual who took the “standard deduction” rather than “itemizing” did not reap any tax savings by making charitable contributions.
But under the CARES Act, individual filers who take the standard deduction and who make charitable contributions of up to $300 in cash/check contributions during 2020 to qualifying organizations can deduct these contributions. For purposes of this deduction, qualifying organizations are those that are religious, charitable, educational, scientific, or literary in purpose.
There are details of this revision of charity code section 62(a)(22) of the Internal Revenue Code (IRC) that are further explained:
· Only individuals who do not itemize on their federal income tax return (they instead take the standard deduction) are permitted to use this deduction;
· The only type of charitable contribution permitted is in the form of cash or check (also, contributions made via credit or debit card). No charitable contributions in the form of goods or services are allowed;
· Any charitable contribution to a qualifying organization may be deducted only if it is supported by a bank record or written receipt. The receipt from a charity should reflect the charity’s name, donation amount and date of contribution. For any contributions over $250, a contemporaneous receipt must be received by no later than the due date for filing the return.
· The $300 maximum deduction is per tax return. That means one $300 maximum deduction whether an individual files as single/head of household or as married filing jointly.
· The $300 maximum contribution is deducted from one’s gross income (as an adjustment to income) and appears on the 2020 Form 1040, line 10b (may be viewed at https://www.irs.gov/pub/irs-pdf/f1040.pdf)
2. The CARES Act temporarily suspends limits on charitable contributions and temporarily increases limits on contributions of food inventory. To understand the significance of this change, it is important to review the pre-CARES Act limits on charitable contributions, together with the changes that will be in effect during 2020 only:
· For 2019 and earlier years, charitable contributions were fully deductible by an individual who itemized on his or her federal income tax return only to the extent that total cash/check contributions are less than 60 percent of the individual’s adjusted gross income (AGI). For 2020 only, cash/check contributions made to public charities (and not contributions made to private foundations or donor advised funds) of up to 100 percent of an individual’s AGI are fully deductible.
· The usual IRS rules for giving charitable gifts of cash/check apply and are summarized:
– the gift may be deducted only if it is supported by a bank record or written receipt;
– the receipt from a charity should reflect the charity’s name, donation amount, and the date of contribution;
– for any contributions over $250, a donor must have a contemporaneous receipt which must be received by no later than the due date for filing the tax return (for 2020, this means no later than April 15, 2021);
– contributions of more than $250 to any organization must have a separate acknowledgement from each organization;
– the contributions must be made to a qualified organization and not designated for use by a specific person in the qualified organization;
· If an individual donates capital assets including stocks, bonds, mutual funds, works of art or other assets on which the individual would have paid capital gains tax if the item were sold, theses items have a contribution limit of 30 percent of the individual’s AGI;
· An individual who makes cash/check charitable gifts during 2020 totaling 100 percent of the individual’s AGI and who also makes donations of stocks, bonds, or other capital assets, cannot receive charitable contribution deductions for the donated assets for the year 2020.
This is because the 100 percent of AGI limit for 2020 has been reached. However, any unused charitable contributions (including donations of stocks, bonds, etc.) can be carried up to the next five years and potentially deductible as charitable gifts in future year tax returns.
What employees should do between now and December 31 in order to take advantage of the CARES Act charitable gifting provisions federal employees and annuitants who want to make full use of the expanded charitable gifting provisions of the CARES Act should do the following between now and December 31:
· If they do not itemize on their federal income tax returns, make their cash/check contributions of at least $300. They should make sure that they have a receipt or a bank record of their donation(s) to qualifying organizations.
· If they do itemize on their federal income tax returns, maximize their cash/check contributions knowing their cash/check contributions are limited by 100 percent of their 2020 AGI. If they have capital assets (stocks, bonds, mutual funds, works of art) they may want to consider selling the assets, incurring a capital gain or capital loss, and take the net cash proceeds and donate to a qualified charity.
There could potentially be a double tax benefit in the form of a capital loss (applies dollar-to-dollar against capital gains and if there are no capital gains, up to $3,000 of loss can be applied towards other income), and the sales proceeds being donated as a charitable gift.
· All charitable donations must be made by Jan. 1, 2021 in order to be counted as part of 2020 charitable gifts. A charitable donation made via credit card in December 2020 will count as a charitable donation for the year 2020 even though the credit card charge will most probably be paid in 2021.