Typically, taxpayers can write off up to 60% of their adjusted gross income for cash donations to qualified charities. The CARES Act increased this amount substantially. People can now deduct 100% of their adjusted gross income for cash donations to charity for the fiscal year 2020.
This provision in the CARES Act is meant to encourage wealthy individuals to donate money to charity during a crisis and when more people need the help of charities. It is essential to realize that the adjusted gross income limits the maximum deduction. Someone with an AGI of $100,000 wants to give $150,000 in cash to his favorite charity. Due to the AGI limit, only $100,00 in charitable contributions will be deducted from taxes. The other $50,000 will be taxable.
The Cares Act has a minor tax break for direct charitable giving to less wealthy people. Taxpayers who take standard deductions can write off up to $300 in cash donations to charities. This is another incentive to encourage people to give directly to their favorite charity and to be able to benefit from it in the form of a lower tax bill.
There are a few caveats in the charitable deduction provisions in the CARES Act. First, private foundations are excluded from the new cash deduction provisions. Donor-advised funds are also not eligible for the new rules. The new rules also only apply to direct cash contributions to a charity. A check to a charity would be considered equivalent to cash, but stocks, bonds, or mutual funds would not be eligible.
Despite the new incentive for giving cash directly to charities for 2020, many wealth management advisors are still cautioning against giving money directly to charities. They say it is best to donate highly appreciated stock or mutual funds with distributions. If you donate appreciated stock to a charity, you avoid paying capital gains tax on the stock. In addition, you would be able to deduct the stock’s fair market value from your taxes.
Taxpayers should realize that they can give more to charities in 2020 and write off 100% of their AGI instead of their usual 60% for direct cash contributions to charities. Even non-wealthy taxpayers can benefit from charitable giving by deducting up to $300 in direct cash contributions. At the same time, just because you can deduct more from cash donations from your taxes does not mean you should. It may make more sense to donate appreciated stocks or other investments to avoid capital gains taxes.