Tax adviser: Give and you shall receive

CARES Act provision offers $300 deduction to incentivize non-itemizers to give to charity in 2020.
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Phil Mitchell. Courtesy Kroon & Mitchell

The Coronavirus Aid, Relief and Economic Security (CARES) Act legislation included a tax break that a local accountant hopes will encourage West Michiganders to give whatever they can to charity this holiday season.

In Section 2204 of the federal CARES Act, Congress included a provision intended to offer some measure of relief for charitable organizations amid an unprecedented public health crisis. The provision permits eligible individuals who do not itemize deductions to deduct up to $300 of qualified charitable contributions as an “above-the-line” deduction, which lowers the tax filer’s adjusted gross income (AGI) by $300 for the 2020 tax year.

Phil Mitchell, president of Grand Rapids-based tax and investments firm Kroon & Mitchell, said he has been working to spread the word to local nonprofits about the tax break so they can share the information with their donor base, as donations to nonprofits fell sharply this year due to the pandemic and economic downturn.

The CARES Act provision applies to those that take the standard deduction, which Mitchell said represents about 90% of people filing ever since the standard deduction was raised in the Tax Cuts and Jobs Act (TCJA) of 2017. It is now $12,400 for single filers and married filers filing separately, $24,800 for married filers filing jointly and $18,650 for heads of household.

Mitchell said he hopes the $300 tax break will help at least partially offset a pair of factors affecting charitable giving levels right now.

The first factor has to do with another provision of the CARES Act — Section 2203, the temporary waiver of the required minimum distribution (RMD) rules for certain retirement plans and accounts, including independent retirement accounts (IRAs), for those 70.5 years and older in 2020. He said the suspension of the RMD for 2020 was likely included in the CARES Act to protect retirees from drawing down their IRA balances in a year with significant stock market losses. However, the ability to give tax-free charitable donations from one’s IRA account up to a certain amount has been a feature for years, and with the requirement to take a distribution gone, some folks may be disincentivized to make these mutually beneficial donations, Mitchell said.

“When you don’t have to do the distribution from your IRA, well, some people might hold off of doing that charitable piece until next year, when they have to do a required minimum distribution,” he said.

“It’s nice to say, ‘Next year,’ but the toughest part of this pandemic is that some groups might not be around next year. They’ve got to exist in the future (for you to donate next year). … We know all of these entities have more needs than they ever have before. … They’re doing great things, but more people need to help right now.”

The second factor affecting giving levels right now is the doubling of the standard deduction that took effect with the passage of the TCJA and began impacting tax filers beginning in the 2018 tax year.

“That was significant because it increased so much, many people were not able to itemize and write off their charitable contributions anymore,” Mitchell said, which meant some people didn’t bother to give like they used to.

He said while the $300 write-off is “not a huge amount,” it could help to prompt the people who are motivated by deals to continue supporting qualifying charities during a time when the usual fundraiser events are impossible, and many nonprofits are struggling with finances.

Mitchell said another change he hopes will support charitable giving in West Michigan is that the CARES Act temporarily lifted the limit corporations can deduct on qualified charitable contributions to 25% of taxable income rather than 10%.

For “average Joes,” he said the $300 tax deduction will probably be the most helpful incentive. The tax break is available on donations by cash or check up to $300 — stock transfers are exempted — and cannot be claimed on donations to political organizations or donor-advised funds. Mitchell said tax filers should plan to keep their receipts in case of an IRS audit.

More details are on page 65 of the CARES Act, at bit.ly/caresactfulltext.

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