In response to the pandemic, the CARES Act provides additional incentives for charitable giving, an important one of which was extended into 2021. This year, taxpayers can deduct up to 100% of their Adjusted Gross Income (“AGI”) for cash gifts to certain public charities such as the North Carolina Bar Foundation. This provision allows additional planning options, including a unique opportunity, which expires December 31, 2021, to give large amounts of retirement plan assets to charity.
Many are familiar with the “IRA charitable rollover,” the popular name for the technique allowing taxpayers over age 70 1/2 to transfer up to $100,000 from their IRAs without recognizing the income for tax purposes. The CARES Act provision may allow greater amounts to charity from any qualified retirement account (not just IRAs) without significant adverse tax effects.
In 2021, a donor, who can withdraw funds without penalty from a retirement plan, could sell assets within the plan and receive a cash distribution (including amounts greater than $100,000) and then contribute the cash to charity. The charitable deduction could offset the income recognized by the donor. This technique would reduce the size of the retirement account and thus may reduce future taxable minimum distributions. It might be particularly attractive to donors otherwise planning to give their retirement plans to charity at their deaths since it allows them to give the funds sooner, while they are alive, allowing them to enjoy the results of their generosity. Further, donors might be able to use their retirement assets to make larger current charitable gifts or fulfill a current pledge.
Also, while donors often give appreciated securities to public charities to avoid the tax on capital gains, such gifts are deductible in the year of the gift only up to 30% of AGI (though charitable deductions may be carried forward for 5 years). As an alternative this year, a donor might sell some assets and gift the resulting cash up to 100% of AGI, taking the deduction this year.
Of course, like many tax provisions this 100% deduction rule has very specific requirements and impacts, so any potential donor needs to have the donor’s CPA or other tax professionals review the individual circumstances of the donor and all applicable rules (of which there are many).
But in the right circumstances, in 2021, a donor could give up his or her entire retirement plan account to the North Carolina Bar Foundation, potentially with limited adverse tax consequences.