The CARES Act (P.L. 116-136) keeps yielding hidden tax planning opportunity gems – especially now that we are focused on reducing 2020 tax liabilities.
One of these hidden gems is the opportunity to “stack” charitable contributions.
What the CARES Act Provides and How Stacking Works
CARES Act §2205, when combined with the provisions of Internal Revenue Code (IRC) §170, can be interpreted to allow cash charitable contributions, on top of non-cash contributions, not to exceed 100% of an individual taxpayer’s adjusted gross income (AGI).
My friend Dave Kirk who serves with me on an AICPA Technical Resource Committee and is the Private Tax Leader at EY explains it clearly:
The opportunity to stack the cash contribution limitation on top of the other percentage limitations is a 2020 only windfall for taxpayers, especially those with contribution carryovers. Because these special cash contributions are the last contribution to be applied to the contribution base (a/k/a AGI) the normal rules of IRC §170 will apply. Therefore, regular contributions made in 2020 come first, carryovers from prior years come second, and then the special cash contributions come last. This allows extremely generous taxpayers to clear out their carryovers while still maintaining their normal level of giving. This also allows many taxpayers to zero-out taxable income.
According to Kirk, 100% of AGI is not the target threshold for those looking to eliminate taxable income. The target contribution amount is the excess of (a) AGI, minus (b) the total of all other itemized deductions (e.g: state and local taxes, and mortgage and investment interest) other than charity. He provides the following example: A taxpayer has $1,000,000 of AGI, $10,000 of real estate taxes paid, and $80,000 of interest expense, their target for charitable donations is only $910,000. This could be accomplished by giving $300,000 of appreciated securities to a donor advised fund (DAF) or public charity, and then contributing $200,000 of cash to a DAF or public charity, and then ‘topping up’ with $410,000 of these special cash contributions. The same would occur if this taxpayer had $300,000 of 30% percent $200,000 of 50-percent charitable contribution carryovers, respectively. Thus, the taxpayer with carryovers could give away $410,000 in cash in 2020 and have zero taxable income.
It is important to remember that charitable contributions do not offset self-employment tax or net investment income tax (NIIT). Even if a taxpayer zeroes out their taxable income, there may still be some liability on the 2020 return.
The Hidden Trap
Most states have not conformed to the CARES Act, so it is likely stacking will only yield a federal income tax benefit for 2020. Since charitable contributions can be carried forward for five years, care must be taken to make sure a state income tax benefit is not lost.
With time running out for making 2020 charitable contributions, charitably inclined individuals should consider the stacking strategy to reduce or eliminate their 2020 federal taxable income.