CARES Act creates unique opportunities from an individual tax perspective
To our clients and friends,
As always, we wish you and your family safe passage through this challenging time. “Staying in touch” is truly a figure of speech when many of those on the front line can’t even touch their immediate family members! We’ll try to keep you up to date on how best to interact with the various governments’ programs from a tax and cashflow point of view.
100% of AGI Charitable Donation
As we learn more about the many provisions of the CARES Act, one that stands out from an individual tax perspective is the ability to donate up to 100% (that’s right, ALL) of your 2020 Adjusted Gross Income (AGI) to charity if you itemize your deductions. Normally, deductions for cash donations to most organizations are limited to 60% of your AGI. For 2020, the CARES Act suspends the 60% limitation, so we can deduct up to 100% of AGI for contributions. The modified limits apply to cash donations only, however taxpayers can still rely on the 20% and 30% limitations on certain long-term gain property as part of the overall donation plan.
What to do with this news
Naturally, since we are tax strategists, we prefer to think about the future rather than the past and this CARES Act provision creates unique opportunities that could apply, depending on individual situations, plans, and expectations for the future. Two examples follow.
1. Bunching of Deductions
The first thought we have is to use this to bunch your deductions for the next two or more years into 2020. This way you itemize for 2020 and use standard deductions into the future. For example, if you normally donate $8,000 per year to qualified charities and use the standard deduction, your 2020 deduction could be $16,000 or $24,000, Your standard deduction for 2021 and perhaps 2022 would not change. Of course, you would communicate with your charities about making several years’ donations at once. Using this technique, you donate a similar amount over time, but to a much better tax effect overall.
2. Drastic reduction of ordinary income
Many of our clients have multiple sources of income such as dividends, capital gains and ordinary income from compensation, interest, retirement accounts, or businesses. For those people, the type of income a deduction reduces can make a significant difference in the net taxes paid, due to different rates. Fortunately, the tax law applies itemized deductions favorably for the taxpayer, reducing ordinary income to zero before reducing favorably taxed income like qualified dividends or long-term capital gains.
Knowing this, if we create a tax plan to donate most or all of a person’s ordinary income, the tax rate on qualified dividends and long-term gains can be as low as zero percent. In the case of larger gains, the rate could be higher, most often 15%.
Do these strategies apply to me?
Clearly, these strategies are not for everyone. They depend on availability of opportunity and the ability to fit the strategy into each client’s overall financial plan.
Please stay safe and come talk to us! We’re here to help!
Werner & Company, CPAs
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