New legislation was enacted this year that allows tax deductions on two types of charitable gifts. One allows up to $300 as an above-the-line deduction. The second is the ability to deduct up to 100% of your Adjusted Gross Income for larger donations.
The first type of charitable gift allows up to $300 to be given to a qualified charity and claimed as an above-the-line deduction. After the Tax Cuts and Jobs Act, which went into effect in 2018, increased the standard deduction, many taxpayers had less incentive to donate to charities. Instead, they took the standard deduction and stopped itemizing, which included the charitable deduction. The new $300 charitable deduction is above the line and taxpayers can take the deduction without itemizing. It’s not a huge amount, but charities are in great need and would love a $300 contribution.
If you are a supporter of nonprofit organizations (501 (c)(3)) and you have the ability to make a significant contribution, the CARES Act offers a good opportunity to fulfill that desire and deduct up to 100% of your adjusted income. For example, if your AGI is $100,000 for 2020 you could potentially make a $100,000 donation to a qualified charity and deduct the full amount from your income. You are usually only allowed to deduct up to 60% of your AGI. For some high-net-worth taxpayers, if 2020 was not a high- income year, a large charitable contribution could balance out their entire tax bill.
You can also benefit by doing a charitable contribution alongside a Roth conversion. Converting a traditional IRA to a Roth IRA triggers income tax liability on the contributions made to the traditional IRA. By completing the conversion during 2020, and making a sizable contribution to a charity, you may be able to mitigate some or all of that tax liability and help the charity at the same time.
Many parents have young adult kids who may not be able to give to charity on their own, so it may be a good opportunity to give young adult children $300 that they can donate to a charity they care about, and they can take that $300 above the line deduction. You can help instill that giving spirit for future generations.
Remember that all 2020 charitable contributions need to be made by December 31 st , 2020.