Here are three provisions and what they mean for donors.
#1: Additional above-the-line deduction for up to $300 of qualified charitable contributions in 2020. Section 2204 of the CARES Act permits a deduction in the determination of adjusted gross income (AGI — “above the line”) for up to $300 of cash contributions to charity made in taxable years beginning in 2020. This deduction is not subject to any of the AGI limitations provided in Code section 170. It is available only to persons who do not itemize deductions, and accordingly does not prevent a person from taking the standard deduction, but is instead in addition to the standard deduction. The contribution may not be made to a private foundation, supporting organization, or donor-advised fund as defined in Code section 4966.
A donor-advised fund, by definition in section 4966, does not include a fund that makes distributions only to a single identified organization, such as a single charity fund established with the PCAF. In most cases, it would make sense for a donor to make such $300 contributions directly to churches and other end-user ministries rather than to a single charity fund at the PCAF, but we want to serve the PCA and its members by publicizing and encouraging such direct contributions. In addition, however, a donor who has made qualified charitable distributions from his IRA to one or more single charity funds at PCAF may want to add the $300 to one or more of those funds.
#2: IRA charitable rollover (“qualified charitable distribution” or “QCD”) still tax-efficient despite waiver of required minimum distributions. Section 2203 of the CARES Act amends Code section 401(a)(9) to waive required minimum distributions from retirement plans for the calendar year 2020. However, the Act did NOT correspondingly cancel the exclusion from taxable income of up to $100,000 of direct distributions to charity from an IRA after the IRA beneficiary has reached age 70 ½ (called “qualified charitable distributions” or “QCDs”). Such QCDs still may be more tax-efficient than gifts from current income because realizing the exclusion leaves the standard deduction in place while deducting a current-income gift requires foregoing the standard deduction.
For example, a person with $100,000 of current income who pays $50,000 in living expenses from an IRA distribution while giving $50,000 of current income to charity adds the $50,000 IRA distribution to taxable income and deducts $50,000 from taxable income for the charitable gift, but gives up the $24,000 standard deduction. His taxable income is $100,000. If that person instead makes a $50,000 QCD from his IRA to charity and pays $50,000 in living expenses from current income, he excludes the $50,000 QCD from taxable income, but still deducts the standard deduction, $24,000, from taxable income. His taxable income is $76,000.
Remember that although a donor may not make a QCD to a donor-advised fund, PCAF’s single-charity funds by definition are not donor-advised funds since each such fund may distribute only to a single identified charity. A donor may establish one or more single charity funds with PCAF, each for the benefit of a named charity, to receive prescribed portions of a QCD from his IRA. The donor may then advise PCAF over time to make distributions of varying amounts from each such fund to its prescribed charity.
A donor with a large IRA that he does not expect to need who anticipates a market rebound may consider a QCD to a PCAF single-charity fund in 2020 to be particularly effective. Appreciation of funds distributed to the single-charity fund will occur outside the donor’s IRA, free even from deferred taxation, and be available for increased grants over time to the favored ministry.
#3: Cash contributions deductible to the extent of 100% of adjusted gross income in 2020. Section 2205 of the CARES Act effectively raises temporarily the deduction limitation for cash gifts an individual donor makes to public charities in 2020 — and therefore, the maximum possible deduction for any charitable gifts in that year — from 60% to 100% of adjusted gross income, provided the donor makes an election to have the temporary limitation apply. (The excess of gifts over that higher limitation is eligible for carryover deduction for five years under the normal excess carryover rules.) Such gifts may include a partner’s share of gifts made by a partnership. Section 2205 also raises the deduction limitation for cash gifts an S or C corporation makes in 2020 from 10% to 25%. In cases of gifts made by a partnership or S corporation, the individual partner or shareholder must make the required election.
A few clarifications: the gifts must be made in the 2020 taxable year, which means the donor’s tax year beginning in 2020. A public charity, roughly speaking for these purposes, is a charity other than a grant-making private foundation or a supporting organization, such as a church, school, or publicly-supported organization such as the PCA Foundation. To qualify for the increased deduction limitation, the gift cannot be made to a donor-advised fund “as defined in section 4966 of such Code.” As noted above, however, section 4966 excludes from its definition a fund of a public charity that makes grants only to a single identified organization, such as a single charity fund established with the PCAF.
To better understand the effect of this CARES Act change, note first the general Code deduction limitations: an individual donor may deduct the amount of cash gifts he makes to public charities in a year that does not exceed 60% of his AGI. The donor also may deduct the amount of gifts of long-term capital gain property that does not exceed the lesser of 30% of AGI, and 50% of AGI reduced by the amount of cash gifts the donor deducts. Put another way, deducting the amount of gifts of long-term capital gain property reduces the maximum deduction possible from 60% to 50%. To illustrate, if a donor gives and deducts an amount of cash equal to 40% of his AGI, he may deduct also the value of marketable securities held for more than one year only to the extent of 10% of his AGI.
Under the CARES Act increased limitation for 2020, however, a donor may deduct the amount of cash gifts he makes to public charities right up to 100% of AGI. Also under the CARES Act, deducting gifts of long-term capital gain property and other gifts that are not gifts of cash to public charities does not reduce the maximum deduction possible below that 100%. So, to illustrate, a donor may give to a donor-advised fund such as the PCAF’s Advise & Consult Fund or its Increase Fund, and deduct, the value of marketable securities equal to 30% of AGI, and cash equal to 20% of AGI, and also give to a PCAF single charity fund, and deduct, additional cash equal to 50% of AGI. Alternatively, a donor may give to a PCAF Advise & Consult or Increase fund, and deduct, cash equal to 60% of AGI, and give to a PCAF single charity fund, and deduct, additional cash equal to 40% of AGI.
A donor who desires to make unusually large contributions in 2020 may find it an opportune year also to convert his or her traditional IRA into a Roth IRA, especially in light of the extraordinary market losses experienced this year. Any taxable income incurred upon the conversion may be completely eliminated by charitable contributions since those contributions are fully deductible to the extent of 100% of AGI (including the income incurred upon the conversion).
Disclaimer: The foregoing is general information only, and is not presented as legal or other professional advice for reliance by the reader. The reader’s particular circumstances may result in consequences different from those described. The PCA Foundation encourages the reader to discuss the information and ideas presented with his or her own qualified legal or other professional counsel before making any charitable gift, instructing any distribution, or taking any other action in response to such information or ideas.