San José Clinic is responding quickly to and adapting operations for the COVID-19 pandemic. The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act includes new tax rules that were created to help you, businesses and nonprofits facing economic hardship during these difficult times.
Here is a brief summation of the CARES Act that details how it may affect your donation to SJC:
New Tax Benefits
Non-Itemizers can Reduce Their Taxable Income by $300
If you take the standard deduction, the CARES Act allows you to reduce your taxable income in 2020 by up to $300 for cash contributions to charities such as SJC ($600 for married couples) using an “above the line adjustment,” which means it comes before you calculate your adjusted gross income.
Itemizers Benefit, too
For those who do itemize their deductions, the new law allows for cash contributions to qualified charities such as SJC to be deducted up to 100% of your adjusted gross income for the 2020 calendar year. Ordinarily, the income tax charitable deduction for cash gifts is limited to 60% of your income. This 100% limit allows donors to reduce their 2020 federal income tax to zero. Your charitable deductions in 2020 cannot exceed 100% of your income, but you may be able to carry unused charitable deductions forward to future years.
It may not be the tax-wise choice to deduct up to 100% of your income.
Because federal income tax rates are progressive, it is not a given that it will be to your advantage to deduct 100% of your cash contributions in 2020. Check with your financial or other advisors to determine whether the 100% deduction makes sense for your specific circumstances.
Required Minimum Distributions Waived in 2020
For the year 2020, there will be no mandatory distributions from retirement accounts (whatever the age of the owner), thus allowing those accounts to recover. The minimum age for making a tax-free transfer from an IRA to a charity remains at 70½, and the annual limit remains at $100,000. However, since cash gifts are deductible in 2020 to the extent of adjusted gross income (100%), a person could withdraw and then contribute a larger amount—with the deduction offsetting the taxable withdrawal.
Qualified charitable distributions are still a great way to make contributions.
Even though RMDs are waived, if you are 70 ½ or older, you can still use your IRA to get a tax break on giving to charities. You can do so with qualified charitable distributions (QCDs) from your IRA. The funds are directly transferred from your IRA to SJC and are excluded from income. Normally, this would go towards satisfying your RMD. But even though there are no RMDs this year, this is a better way to give to SJC and reduce your taxable IRA balance at the same time. You pay no income taxes on the gift and the transfer generates neither taxable income nor a tax deduction. So you benefit even if you don’t itemize. Only IRA owners and beneficiaries who are age 70 1/2 or older qualify for this, though. This age did not change even though the age for RMDs was increased to 72. If you don’t do a QCD, your only charitable deduction is likely to be the new $300 above-the-line deduction created by the bill. (Above-the-line means it comes before you calculate your adjusted gross income). Otherwise, you probably will get no benefit from your donations, since most people take the standard deduction. Since the gift doesn’t count as income, it can reduce your annual income level. QCDs give you back a tax benefit that would otherwise be lost. This may help lower your Medicare premiums and decrease the amount of Social Security that is subject to tax. QCDs are another reason to withdraw from your IRA, even if you don’t have to. If there is any downside at all to this RMD relief, it’s that, unfortunately, anyone who needs the funds and takes the RMD anyway will not benefit. According to the Treasury’s own numbers, they estimate that roughly 80 percent of IRA owners take more than the minimum, so this relief will not help a majority of those who rely on their retirement savings for annual income.
Waiver of Penalties When Retirement Funds Are Used for Coronavirus Purposes
If you are under the age of 59½ and withdraw money from your retirement plan to cover expenses incurred by you or a family member related to treatment of the coronavirus, the 10% tax penalty will not apply, taxation of the distribution can be spread over three years, and the amount withdrawn can later be added without regard to contribution limits.
Please note: this information does not constitute legal or financial advice and we strongly encourage you to consult with your tax advisor about these strategies and whether they may be appropriate to your individual circumstances.