There is some tax relief from the CARES Act to help charitable organizations cushion the coronavirus's effect. This tax relief aims to encourage donors for the 2020 tax return and also encourage charitable giving.
This article seeks to explain the implication of above the line deduction and eliminated contribution limit as it applies to charitable giving.
Above the Line Tax Deduction and How it Applies to Charitable Contribution.
One of the effects of the Tax Cuts and Jobs Act of 2017 (TCJA) is that the number of the taxpayer that can itemize and get tax benefits was reduced. These are tax benefits from charitable contributions due to the standard deduction that was boosted. This made some donors reduce their contribution.
In a bid to re-incentivize charitable giving, the CARES Act created an above the line deduction worth $300 for qualified charitable contributions. All taxpayers eligible for the deduction can take the standard deduction, which will be on their 2020 return.
Even though the deduction is available for 2020 contribution alone, there are indications that future legislation might change it. Only cash donations and not stock or donations like clothing and properties qualify. The donation must also go to a qualifying charity and not any private foundation or some donor-advised funds.
Getting Rid of the 60% Charitable Contribution Limit.
There is a provision for individual itemization based on the TCJA. This applies to cash contributions for some charitable organizations and could be up to 60% of their Adjusted Gross Income. For individuals with more than 60% gifts, the excess is considered a deductible contribution and brought forward for the next five years.
There were some temporal modifications to the contribution limit according to Section 2205 of the CARES Act. With this, some individuals who itemize are eligible for a charitable contribution. This can be up to 100% of their Adjusted Gross Income.
For the excess contribution, it will be brought forward for the next five years. However, these changes are only for cash contributions that go to 50% charity.
All gifts to private foundations and stock donations are all bound by the 30% AGI rule.
IRA Distribution Opportunity.
Getting rid of the contribution limit makes an excellent opportunity for donors that want a significant impact on charity organizations. These rules allow the donor to have a substantial distribution from their IRA.
For people that want to leave a considerable portion of their IRA to charity in their estate, this is a terrific year to have a significant gift. This applies if you want to have a taxable estate. There is the opportunity to benefit from charitable donations that come during the process and the tax savings.
Taxable Income Planning.
Some charitable contributions allow some taxpayers to bring down their taxable income to $0. While this is interesting to taxpayers, it is not an ideal situation. This applies to people with qualified dividend income and long-term capital gains.
The lowest two tax brackets have 0% federal tax on their income source for people in the lowest two tax brackets. For people in this category, you need extra planning, which will maximize your tax savings.
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