As we enter the final months of this unusual year, we have seen strong support for charitable work across the country, and we still have the busy end-of year giving period ahead of us. It goes without saying that 2020 has been a challenging year and given the host of tax law changes over the last 36 months, a refresher might be useful.
First, consider the 2017 Tax Cuts and Jobs Act which increased the deductibility of cash contributions. Prior to the TCJA, cash gifts were deductible only to the extent of 50% of the donor’s adjusted gross income. The TCJA increased that to 60% of AGI.
This higher annual contribution limit obviously makes cash gifts more appealing for individual donors. And it also may act to reduce the unrelated business income tax (UBIT) that certain charities pay. Charities organized in a trust form can take now also take a 60% deduction for cash grants which can offset the UBIT they incur from donated assets like S-corps, debt-encumbered real estate, and certain pass-through interests (think LLCs and partnerships).
The SECURE Act passed in late 2019 received less attention than the TCJA, but financial planners were quick to note one key change to IRAs – the elimination of the “stretch IRA”. Previously IRA account holders were able to designate non-spousal beneficiaries on the accounts, and on death, that beneficiary would be able to “stretch” the required IRA withdrawals over their lifetime. This allowed young family members to receive the IRAs, take small distributions initially, and grow the accounts over many decades. The SECURE Act instead made such beneficiaries complete the withdrawals in just 10 years.
One charitable workaround for the IRA change we’ve shared with many of you is to designate a life-income charitable vehicle as the beneficiary, usually through either a charitable remainder trust or a charitable gift annuity. These vehicles can be funded with the IRA account proceeds, and the account holder can designate a beneficiary to receive income over that beneficiary’s lifetime, effectively quashing the new ten-year payout rule. On death, the remaining amounts are distributed to a charity designated by the original IRA account holder during their life. This gift structure can also work with life insurance policies.
Finally, in 2020, the CARES Act was passed to provide pandemic relief and among its many other provisions, it increased the cash donation limit of 60% of AGI to 100% in some circumstances and only for gifts in 2020. This deduction is not available for cash gifts to donor advised funds or supporting organizations. Nonetheless, it provides a considerable benefit for certain cash-rich donors and as we pointed out in our recent webinar on the topic. It may also benefit trust-form charities accepting S-corporation stock. The significant tax bill incurred by the sale of those assets can be counteracted by a corresponding (and deductible) grant to a qualifying charity.
These new laws can provide new ways for many donors to give. The TCJA also emphasized donation “bunching”, QCD donations, and repurposing of life insurance formerly used for estate liquidity, in addition to the opportunities defined in the SECURE and CARES Acts.
With a bit of additional planning, these changes can provide enhanced benefits for donors, like lifetime income for a family member or increased charitable dollars. It is our hope that this short summary might be a useful reminder as we rapidly enter the peak 2020 giving season.