During these difficult times, non-profit organizations are especially challenged. Fortunately, agile organizations and a motivated donor base have been able to, at least in part, step forward to help. The government has been helping with funding of its own in the form of direct support and by providing some expanded tax breaks for charitable donors.
THE NEED HAS RARELY BEEN GREATER
Among the areas most impacted by the COVID-19 pandemic, non-profit agencies, particularly those that provide human services, certainly rise to the top. Non-profit organizations are being stretched to carry out their missions in times of great need. So frequently, the first line of resources for people who experience problems with health and wealth are local non-profit organizations, and they’re being called upon to perform more and more services during this health crisis.
Yet despite the call upon nonprofits to be there to serve, these very organizations are operating under continuously tightening financial constraints. Often, the communities they serve are less able to support them because of financial uncertainty and massive slowdowns in the economy and job market. Fundraising events such as galas, races, etc… have been shut down out of a need to avoid groups of people. The financial lifelines for these organizations have gone flat, and most nonprofits simply don’t operate with the kind of reserves that allow them to weather such a slowdown.
To make matters worse, this comes at a time when fewer people are able to deduct charitable contributions since the 2017 Tax Cuts and Jobs Act (TCJA) was signed into law. Substantial increases in the standard deduction leave far fewer people in a position to itemize their deductions and this removes a major incentive these people had to give to charitable causes.
Some good news has come about during the pandemic. Paycheck Protection Program loans were made available to non-profits as part of the Coronavirus Aid, Relief, and Economic Secuity (CARES) Act. Many charitable organizations, typically reliant on clever ways of staying in business, also have ‘pivoted’ and found creative ways of providing services in a safe way, while being resourceful in replacing in-person fund raising with more ‘virtual’ means.
But still, the crisis continues, and we should all focus on how we can help.
The good news is that there has been legislation passed to allow people who have charitable intentions to take more advantage of tax incentives. Some of these rules will apply to some people but not others, but the hope is that they will at least in part offset the stress that has been put on these organizations.
‘ABOVE THE LINE DEDUCTION’
The simplest element in the CARES act is the allowance of up to $300 in charitable deductions ($600 for married couples filing jointly) that can be taken on top of the standard deduction. This way, nearly every taxpayer can benefit from some deduction for charitable contributions. The amount is small, though; someone in the 12% federal tax bracket will only save $36 max on taxes for their contribution. It may have been unintentional, but the CARES act didn’t limit this to 2020, so there is a possibility that this ‘above the line’ deduction might survive into future years. This would certainly help organizations who have the ability to aggregate large numbers of small ‘grassroots’ contributions.
MORE DEDUCTIBILITY FOR BIG DONATIONS
For donors who wish to make larger contributions, the ability to deduct these contributions from taxable income has been limited by the donor’s Adjusted Gross Income. Limits still exist, but they have become less stringent. The Tax Cuts and Jobs Act (TCJA) of 2017 expanded deductibility of cash donations to 501(c)(3) organizations from 50% of AGI to 60%. And more recently, the CARES act extended that (at least for the year 2020) to 100% of AGI.
It’s important to underscore that this new higher limitation only applies to cash gifts, not in-kind donations or donations of goods or securities, which are subject to more stringent restrictions.
The expansion of deductibility provides some interesting planning opportunities. For example, consider an individual with significant assets, and who wants to make a $100,000 charitable donation, but only has Adjusted Gross Income of $50,000. If this person has an IRA, she can convert $50,000 of the IRA assets to a Roth IRA, essentially removing all past and future growth of that amount from ever being taxed, and also removes that amount from future Required Minimum Distributions. And the tax bill will be zero on this transaction, because all $100,000 of the income (the normal $50,000 plus the $50,000 due to Roth conversion) was offset by the charitable donation.
For someone without the flexibility to control their income through things like Roth conversions, there is still the ability to carry forward any amount they weren’t able to deduct in 2020 to be deducted in future years.
GIFTING OF APPRECIATED SECURITIES
Stocks experienced great levels of volatility earlier in 2020, and most have not fully recovered. However, there are some, especially large tech companies, who have continued to see steady appreciation in their stocks over long periods of time, INCLUDING 2020. Along with these gains comes the obligation to pay taxes down the road, except…
Although not as significant of a donation limit, someone can still deduct a donation of appreciated securities in 2020, up to 30 percent of their AGI. This can be a valuable tool because the deductible donation is not the ‘cost basis’ in the security, but rather the market value on the date gifted. Instead of selling a stock (and having to pay capital gains taxes on it), a shareholder can lighten their (probable) over-allocation to a stock (and get a good charitable deduction for doing so) by donating shares, instead of cash.
Taxpayers falling below the ‘standard deduction’ who wouldn’t benefit from charitable deductions (beyond the aforementioned ‘above the line’ deductions) can stack up years’ worth of donations by contributing to a Donor Advised Fund. This can allow them the ability to actually deduct contributions (because of the larger amount) and still mete out the donations to charities into the future, as long as they wish. Deduction limits for Donor Advised Funds are 50% of AGI for cash donations and 30% for appreciated securities.
Of course, beyond donations of money, there are plenty of worthy organizations who would love to have your time. Websites like justserve.org and volunteermatch.org are great places to go to find volunteering opportunities available to you.
Get inspired and get involved. Now more than ever, your community needs you! And THANKS.