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Posted September 2020Several pandemics have afflicted the United States during the 20 th century, including the 2009 H1N1 Pandemic (the “Swine Flu”), and the influenza outbreaks of 1968 and 1957. The most deadly outbreak recorded in recent history remains the Spanish Influenza of 1918; however, the current outbreak of Coronavirus (“COVID-19”) is unprecedented for a number of reasons. First and foremost, the outbreak has rocked our modern healthcare system on its heels. Seeing the example of other nations, the United States, through the patchwork of our various governmental entities, has enacted massive “shutdowns” in order to “flatten the curve” of the spreading virus, thereby preventing overloaded hospitals and intensive care units. The great fear is that the virus will affect so many individuals that the healthcare systems will be forced to refuse treatment and prioritize patients, leading to a potential catastrophe.
The shutdown of vast sections of the economy to combat the spread of the virus has led to record unemployment. Financial hardship has proven to be insurmountable for many businesses, which have shuttered their doors. Unfortunately, some of the hardest-hit businesses have been in the medical sector itself. With the suspension of elective procedures to make room for COVID-19 treatment, dollars have poured out of healthcare facilities (both profit and non-profit) like a sieve. Educational institutions are also hard-hit, being forced to operate remotely, or considering whether students can attend classes in person.
Thus, charities are being forced to turn over every rock and stone to find the funds needed for the organization to survive. A recent survey by Fidelity Charitable 2 finds that, from the perspective of a nonprofit, fully 51% of f qundraising and development will be significantly impacted, with an additional 28% expecting to be at least “somewhat impacted.” Ninety percent of respondents also believe that delivery of programs and services will be impacted to some extent.
So, considering that businesses are closing, unemployment is at record numbers, the actual staff of nonprofits believes that their organizations are in dire straits, and everyone is broke, what is the silver lining, if any? Interestingly, the same survey notes that 25% of respondents actually intend to donate more as a result of COVID-19, while 54% expect they will donate the same amount. Only 9% of respondents indicated they would donate less.
Let’s get down to brass tax (pun intended). What tax incentives are available to the 79% of individuals who affirmatively indicate they will contribute the same or more in 2020? Consider the following:
The CARES Act, an acronym for Coronavirus Aid, Relief, and Economic Security Act, was signed into law on March 27, 2020. It contained various economic stimulus provisions, but for our purposes, it also relaxed certain restrictions on charitable giving deductions.
Most people are now familiar with the increase to the standard deduction which was phased into law with the Tax Cuts and Jobs Act of 2017. 3 For single filers, the standard deduction is now $12,000, while joint filers may deduct $24,000. The net result is that far more taxpayers now claim the standard deduction than itemize. 4 In fact, most salaried workers saw almost immediate benefit in 2018 as the withholding tables were adjusted downward to account for the increased deduction.
Another effect is that the charitable deduction became useless to many of the taxpayers who benefitted from the increased standard deduction. The CARES Act aims to combat this by introducing a separate charitable deduction (the “Universal Deduction”) of up to $300 for taxpayers who claim the standard deduction. Three hundred dollars doesn’t sound like much, but the overall effect could be substantial. Everyone should gift at least $300 to public charities this year!
A final note about the Universal Deduction: it is valid only for cash contributions. Congress reasoned that IRS has neither the time nor the resources to audit the value of in-kind donations of property in such a small amount.
Taxpayers who itemized deductions were historically limited to a charitable deduction equal to 50% of their adjusted gross income (“AGI”) in any given year. Any excess is carried forward up to five years. The TCJA did taxpayers a solid and increased the 50% cap to 60%. The CARES Act goes one (giant) step further and eliminates the AGI limitation for 2020. It is conceivable that an employee with plenty of money in the bank could donate his or her entire salary to charity in 2020 and get a refund that TurboTax would properly label “maximum.”
Clearly the lifting of the AGI ceiling will only benefit the truly heavy hitters of charitable giving. However, it may also be used to deplete a pesky retirement account. Assuming you are not dependent on the funds from the retirement account, and are between the ages of 59 ½ and 70 ½ , you can take a cash contribution from your IRA, and then donate the cash to the public charity up to the amount of your adjusted gross income. To sum up, if you have been considering making a large charitable donation for some time, the CARES Act may make 2020 the year that it will be most advantageous for you to do so during your lifetime.
Congress historically has not rewarded corporations for charitable giving to the same extent it has individuals. The CARES Act does offer additional incentive to corporate giving by increasing the cap on the charitable deduction from 10% of taxable income to 25% of taxable income.
Aside from the CARES Act, there are some general thoughts to keep in mind when giving in a bear economy. First, the stock market is generally down, although it has bounced back considerably since its worst point in March. Some may be tempted to gift stock to charity in lieu of cash, but note that there is no benefit to doing so unless the stock is appreciated (i.e., if it has built-in gain). Appreciated stock can be gifted tax free and the donor will receive a deduction for the fair market value of the stock. Loss stock, however, should be sold first, at which point the proceeds can be gifted to charity. The donor will generally not be able to take the loss on the sale, though, unless they have sales of other stock which is appreciated. Better for the donor to hang onto stock and ride the rollercoaster in a down market.
Second, the applicable federal rate (“AFR”) is almost impossibly low. At the time of publishing this article, the rate is 0.4%. This comes into play in the estate planning arena. Typically tax-advantaged vehicles such as the charitable remainder unitrust, an annuity trust, or a gift annuity, provide maximum charitable deduction benefits to the donor when the AFR is high. Donors may avoid creating such vehicles until the AFR bounces back. A low AFR does benefit lead trusts and reserved life estates, though.
Finally, note that estate planning includes both preparing documents which take effect after the decedent’s death or incapacity and making lifetime gifting decisions to control what assets will end up in a donor’s estate. In years past, the charitable deduction for the estate and gift tax was a hot topic. However, under current law, the estate and gift tax exemption is almost $23 million for married couples. Unless the donor expects their estate to exceed that value, they should focus on the potential income tax consequences for their estate. Generally, the most income tax-expensive asset that can affect a donor over time is the retirement account. Thus, as mentioned above, now may be the time to leverage a retirement account for a maximum charitable deduction.
Never forget the cardinal truth that donors are much more likely to give to a public charity because they believe in a cause that the charity is advancing, not simply to claim a tax break. The pandemic has created a plethora of causes that we as individuals are uniting to support, from the health of our population to the strength of our economy. Give because we need it right now, but take advantage of the CARES Act so you can potentially give more.
