The CARES Act, which went into law on March 27, 2020, has several provisions that can supplement charitable giving at almost any level. Largely, this is accomplished by granting a donor a more favorable income tax charitable deduction for gifts to certain charities. A tax deduction then reduces the donor’s taxable income, which in turn reduces the donor’s tax liability. When the entire transaction plays out, the Federal government subsidizes a portion of the gift by giving the tax savings back to the donor. In that way, the donor can afford to give more money to charity.
- Non-Itemized Deduction
First, all individuals who do not itemize their deductions are given a $300 “above-the-line” deduction for charitable cash contributions. Above-the-line means the deduction is available on top of the standard deduction. The contributions must be to U.S. public charities that are neither “donor advised funds” nor “supporting organizations.” Basically, a public charity is one that receives at least one third of its funding from the public or the government. Changes to the U.S. Federal tax laws in 2018 increased the standard deduction to $12,400 for single filers and $24,800 to filers that are married filing jointly (inflation adjusted for 2020). The expectation is that up to 90% of taxpayers will use the standard deduction–meaning they do not itemize deduction. Thus, roughly 90% of taxpayers can take advantage of the $300 above-the-line deduction for charitable cash contributions.
So, if an individual pays a 25% tax rate, and does not itemize deductions, a $300 charitable cash contribution actually only costs, after taking taxes into account, $225. That is because 25% of $300 is $75 (the tax savings), and $300 – $75 = $225.
While these sums might seem paltry, they can have a big impact if properly directed. And, using the $300 deduction does not prevent any individual from giving more to charity. For example, according to Feeding America, each $1 donated to a local food bank can feed 10 people (or 10 meals). Thus, the $225 (after tax) contribution would feed 3,000 people.
2. Itemized Deductions
Second, the CARES Act also changed the rules for those who can itemize deduction. Now, 100% of charitable cash contributions are deductible. Previously, itemized charitable cash contribution deductions were limited to 60% of the donor’s adjusted gross income. Any excess deduction that cannot be taken in 2020 can be carried forward for five tax years thereafter.
The 100% deduction for charitable cash contributions must be elected on the donor’s tax return. This benefit also only applies to donations to the same types of charities as apply to the $300 above-the-line deduction.
While upwards of 90% of taxpayer are expected to take the standard deduction, and the 100% deduction is an itemized deduction, some taxpayers with means to give or with otherwise high itemized expenses (such as health care costs) may be able to take advantage of this provision to subsidize their giving.
These special CARES Act rules only apply to contributions to U.S. charities. However, there are no limitations on the use of the funds by the U.S. charity, so the funds could be used to benefit charitable purposes in a foreign country. This is an obvious problem for foreign charities that need to raise money in the U.S. Thus, for foreign charities, in order to raise money under these provisions, the foreign charity would need to either receive grants from a U.S. charity or set up a separate U.S. charity that is its charitable arm in the U.S. (a so called friends of organization).
While taxes should not be the main consideration for charitable giving, especially when there is so much need, knowing the tax rules can help one understand the extent they can afford to give. Hopefully we will all give freely where it is needed.