The end of 2021 brought with it the expiration of many of the provisions of the COVID-19 pandemic relief legislation, including those related to charitable contributions. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) passed in 2020 and the Consolidated Appropriations Act (CAA) passed in 2021 provided incentives to encourage charitable giving during the pandemic. While these provisions have not been extended into 2022, there are still charitable giving strategies to consider before the end of the year.
Expiring CARES Act & CAA Provisions
Among the most widely used of the CARES Act’s expiring charitable contribution provisions was the ability for non-itemizers to deduct up to a specified amount of cash donations, while still taking the standard deduction. For 2022, only taxpayers who itemize can deduct their charitable contributions.
The CARES Act also removed limits on deductions for certain cash contributions to public charities. These limits revert in 2022 to the pre-CARES Act level of 60% of adjusted gross income (AGI). Deduction limits for certain appreciated non-cash assets held for more than one year remain at 30% of AGI.
Finally, the deduction limitation for donating items such as food inventory returns to being 15 percent instead of the 25 percent set out in the CARES Act. For corporations, this limitation applies to percentage of taxable income, and for non-corporate businesses the limitation applies to the percentage of aggregate net income from the business.
Charitable Strategies & Considerations
Despite the expiration of the noted provisions, there are still a number of charitable planning strategies for taxpayers to consider:
- Qualified Charitable Distributions (QCD) from IRAs – A QCD is a charitable contribution made directly from an IRA to the desired charity and are available to those over the age of 70 ½ . For those over age 72 in 2022, these amounts would count toward satisfying the Required Minimum Distributions (RMD) from the IRA (up to $100,000 annually) but are not taxable income to the IRA holder. This can be a valuable strategy for retirees who are not able to itemize because QCDs replace the benefit of the itemized deduction with the ability to not recognize the distribution from the IRA as taxable income.
- Contributions to DAFs – Donor Advised Funds (DAFs) have been popular tax planning vehicles. The DAF allows for a taxpayer to make a charitable contribution to the fund and take a deduction in the year of contribution, subject to the overall AGI limitations for charitable contribution deductions. The fund can accept gifts of cash or appreciated securities; however, these are subject to the limitations noted below. Under current laws, the fund can then make contributions to qualified charities in a future year.
- Charitable Trusts – Charitable remainder trusts are one way individuals can contribute highly appreciated assets which generate a charitable contribution deduction while also providing for an income stream to the beneficiary, usually the donor. The amount of the charitable contribution recognized will depend upon the terms of the trust, and the associated deduction remains subject to the overall AGI limitations applicable to charitable contributions.
- Gifts of Appreciated Securities – Although the market has seen some significant declines in 2022, some taxpayers may be holding securities that have appreciated in value. Gifting those securities to qualified charities allows the taxpayer to take a deduction at the fair market value on the date of the gift and avoid recognizing the long-term gain that would have occurred if the security had been sold. The deduction for these types of gifts is capped at 30% of the taxpayer’s AGI, but any unused deduction can carry forward for five years.
- Donation of Cash Proceeds from Sales of Depreciated Securities – For those securities which have declined in value, it may be more advantageous to sell the securities for cash, recognize the capital loss, and donate the cash proceeds. Capital losses first offset capital gains and then offset up to $3,000 in ordinary income in the current year. Any additional capital losses would carry forward to future years.
- Donation of Digital Assets – Taxpayers are increasingly investing in digital assets such as cryptocurrency, and many charitable organizations are now accepting these types of donations. Like the gifting of securities noted above, appropriate planning in connection with digital asset donations may allow taxpayers to avoid recognition of capital gains or harvest losses from those assets that may have lost value.
- Bunching Charitable Contributions – If a taxpayer is unable to itemize every year, there is an opportunity to bunch two years of donations into one tax year to meet the itemization threshold. Then the taxpayer would skip the next year’s donation in the following calendar year and take the standard deduction.
- Tax Rate and Income Considerations – In general, taxpayers aiming to manage their tax bill via various charitable contribution strategies need to be aware of their current and potential tax rates to assess the best timing for gifts.
Charitable contributions can be an important tax planning strategy for an overall wealth plan. It is important to understand available options and pending legislation that may affect these decisions. For more information on tax planning or wealth planning through charitable giving, contact your tax advisor at FORVIS or submit the Contact Us form below.
View articles from FORVIS' 2022 Tax Guide here.