New Deduction Rules Raise Questions
The recently-enacted CARES Act added two temporary provisions regarding the deductibility of cash gifts. First, the Act added a $300 above-the-line deduction for nonitemizers. Second, the cash deduction limit for itemized deductions was temporarily increased from 60% of adjusted gross income (AGI) to 100% of AGI. These seemingly-simple provisions have raised a few important questions.
Nonitemizers are able to donate cash to public charities and claim the above the line deduction. Cash contributions to donor advised funds and supporting organizations are excluded from this provision. One popular question that has arisen is whether the new $300 above-the-line deduction is allowed per taxpayer or per tax return. In other words, does a married couple filing jointly get a $300 deduction or a $600 deduction? Section 2204 of the Act states that the $300 deduction is available for “qualified charitable contributions made by an eligible individual during the taxable year.” Given that the Act uses the term “individual,” many have interpreted that to mean a married couple filing jointly may together deduct $600.
Nevertheless, the Joint Committee on Taxation (JCT) recently released its Description of the Tax Provisions of Public Law 116-136, The Coronavirus Aid, Relief, and Economic Security Act. In footnote 76, the JCT explains, “The $300 limit applies to the tax-filing unit. Thus, for example, married taxpayers who file a joint return and do not elect to itemize deductions are allowed to deduct up to a total of $300 in qualified charitable contributions on the joint return.”
The other cash gift provision of the Act, Sec. 2205, temporarily increases the deduction limits for cash gifts for itemizers. Prior to 2018, taxpayers who itemized their deductions were able to deduct up to 50% of adjusted gross income (AGI) for cash gifts to charity. The Tax Cuts and Jobs Act of 2017 increased the cash deduction limit to 60% for tax years 2018 through 2025. Now, under the CARES Act, cash gifts to charitable organizations in 2020 are deductible up to 100% of AGI.
Many donors and gift planners are curious just how far this provision goes. Are all cash gifts to charities deductible up to 100% of AGI? If not, what exceptions exist? The CARES Act specifically excludes gifts to donor advised funds and supporting organizations, but it does not directly address other popular gifts such as charitable gift annuities and charitable remainder trusts. However, a more thorough reading of the Act reveals the clues needed to decipher which planned gifts qualify for 100% of AGI treatment.
Charitable gift annuities and charitable remainder trusts bear a number of similarities. For each type of gift, a donor transfers assets or cash in exchange for a stream of payouts. The donor is usually entitled to a charitable income tax deduction for the present value of the remainder interest. At the end, the charity is able to use the remaining value.
However, the differences between these two gift types are important to understand. A charitable gift annuity is a contract between a donor and a charitable organization. The donor transfers the assets or cash directly to a charitable organization in exchange for a promise to pay. The charity either holds and manages the funds in a reserve account or hires a third party to do so. It is a best practice for the charity to put most, if not all, of the donated assets into the reserve account. In fact, many states require a specific amount to be held in reserve. However, it is possible for the charity to put those funds to use immediately, even though it is not advisable to do so.
On the other hand, when a charitable remainder trust is funded, a donor transfers assets or cash to the trust. While the trust will have a charitable remainder beneficiary and the charity may be involved as trustee, the trust receives and holds (or sells and reinvests) the donated assets, not the charity. The charity does not receive the assets until the trust terminates.
With these differences in mind, then, let’s look at the language of the CARES Act. Section 2205 states that qualified contributions must be “paid in cash during calendar year 2020 to an organization described in section 170(b)(1)(A).” When a donor funds a charitable gift annuity with cash, the transfer is made directly from the donor to the charitable organization. Because the charitable organization is directly receiving the cash gift, the deductible portion of the gift may qualify for treatment as a 100% type gift. The donor’s qualified counsel should review the CARES Act and provide the donor with guidance.
However, when a donor funds a charitable remainder trust with cash, that cash is not transferred directly to a Sec. 170(b)(1)(A) organization. Instead, it is transferred to a Sec. 664 trust. Even though the remainder will eventually benefit a Sec. 170(b)(1)(A) organization, the cash is not paid to a Sec. 170(b)(1)(A) organization during the year. Therefore, this is not a qualified contribution for the purposes of the CARES Act.
Any time a new law is passed, there is an adjustment period – a time when individuals and organizations affected by the new law (and their attorneys) scramble to gain a comprehensive understanding of the new provisions. Oftentimes, quickly-drafted legislation may contain language that needs clarification down the road. These considerations highlight how imperative it is that donors consult with their professional advisors to gain an understanding of any new laws that will affect their deductions before moving forward with a gift.