The heightened fundraising needs many nonprofits are feeling right now make it important that potential donors understand the tax benefits they stand to reap. Here are some of the advantages you should convey to encourage their support.
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), enacted in late March, expands the availability of individual and business charitable contribution deductions. Individual donors who claim the standard deduction can deduct up to $300 for cash contributions to qualified charities in 2020. The deduction is “above the line,” meaning donors can claim it without itemizing deductions. Note, though, that contributions to donor-advised funds (DAFs) don’t qualify.
The CARES Act also relaxes the ceiling on charitable deductions for individuals’ cash contributions made in 2020, boosting it from 60% to 100% of a donor’s adjusted gross income. (Again, donations to DAFs are ineligible.)
The limit on a corporation’s deduction for cash donations is increased from 10% to 25% of modified taxable income. The law raises the limitation on deductions for contributions of food inventory from 15% to 25% of income, too, though the definition of income depends on the entity type.
Qualified charitable distributions (QCDs) — also known as IRA charitable rollovers — have become more popular since the Tax Cuts and Jobs Act took effect. Taxpayers who don’t itemize their deductions because of the higher standard deduction can use QCDs to obtain tax benefits.
Specifically, donors who are age 70½ or older can distribute up to $100,000 per year to 501(c)(3) public charities with QCDs from their traditional IRAs. These distributions must be direct to the organization; they can’t go through a DAF. QCD donors can’t claim charitable contribution deductions for such distributions, but the distributions are excluded from the donor’s taxable income, providing tax benefits even if the donor doesn’t itemize deductions. The donor can’t, however, receive any goods or services in exchange for the donation.
You should note that the Setting Every Community Up for Retirement Enhancement (SECURE) Act, signed into law in late 2019, includes several provisions that could affect QCDs. Perhaps most significantly, it raises the age for required minimum distributions (RMDs) from traditional IRAs from 70½ to 72 for original IRA owners who didn’t turn age 70½ by December 31, 2019. This could delay your receipt of QCDs, because many donors make QCDs to avoid tax liability on RMDs.
Donors are still allowed to begin making QCDs at age 70½. But without being subject to RMDs, some might prefer to leave the money in their IRAs to continue to grow tax-deferred until they’re subject to RMDs. Changes allowing working individuals to make IRA contributions after age 70½ also might reduce QCDs.
Finally, the CARES Act waives RMDs for 2020, so even donors already subject to RMDs don’t have to take them in 2020.
Despite these changes, QCDs can still be an excellent tax-saving tool for donors age 70½ or older who want to give more than $300 in 2020 but won’t give enough to benefit from itemizing deductions. So, it’s still a good idea to make sure your donors are aware of this option and its benefits.
If your organization can accept donations of stock, it can pay off significantly for the donors of appreciated shares. Because the donor can potentially avoid paying capital gains taxes on those shares, he or she may be able to make a larger donation.
Donors can deduct the full fair market value of the donated stock if they held it for more than a year before the donation. If the stock was held for a shorter period, the deduction is limited to the cost basis (generally, the purchase price adjusted for corporate actions like stock splits and dividends).
Unfortunately, many individuals have found themselves holding stock that has dropped in value as a result of the COVID-19 financial crisis. They typically are better off selling the shares first and then donating the proceeds. This approach allows them to claim the losses for tax purposes in addition to claiming a charitable deduction for the cash gift.
Your donors and potential donors are dealing with a lot these days, including possible job loss and reduced savings. Many of them probably haven’t lost their charitable inclinations, though, and may in fact feel a greater urge to lend a helping hand. By explaining the tax advantages of giving, you might provide the nudge they need to act.