By Katie Everts and Nick Cericola
The CARES Act
nods to the need for widespread philanthropy during the Covid-19 pandemic, but it may not create robust new incentives. The bill gives three temporary tax incentives to donors in calendar year 2020. Each incentive, however, excludes donor advised funds (DAFs) and charities classified as 509(a)(3) supporting organizations
. Some hospital foundations fall into the latter category, depending on their IRS determination.
What parts of the CARES Act encourage charitable giving?
- Universal deduction for cash contributions: Non-itemizers, who represent 85% of American households, can take a one-time above the line deduction from their income when they donate up to $300 to a nonprofit in 2020.
- Individual deduction cap increase: Taxpayers that itemize their taxes can deduct cash donations up to 100% of adjusted gross income (AGI). Section 2105 of the Act suspends the previous 60% AGI cap for 2020.
- Increased deduction cap for corporations: Corporations can deduct charitable cash contributions and food donations up to 25% of their 2020 income. Previously, they were only able to deduct up to 10% of their income from cash contributions, and up to 15% of their income from food donations.
What parts of the CARES Act deter charitable giving?
- Required minimum distribution (RMD) waiver: Older taxpayers can delay taking out RMDs until 2021. RMDs are the annual amount of funds that taxpayers (over 70.5 years old) are required to withdraw from their retirement plans. By waiving RMDs, the bill indirectly reduces the pressure on taxpayers to put their RMD toward charity. Typically, affluent taxpayers make qualified charitable deductions (QCDs) from their retirement accounts (e.g. IRA) to reduce their RMD burden.
- Limiting the types of nonprofit entities: Charitable contributions to supporting organizations, or DAFs, do not benefit from the legislation’s incentives.
What is the anticipated impact?
Individual tax incentives are unlikely to significantly and directly impact 2020 giving. Very few individuals are capable of donating 100% of AGI; the Tax Policy Center suspect only 2% of taxpayers annually donate 33% of AGI. Even if there are gains from the deduction cap increase, the RMD waiver may offset those gains when affluent taxpayers forgo making their annual QCD.
Most tax experts agree that a universal deduction increases giving, but it is unlikely that the $300 deduction is a strong enough incentive. Typically, Americans donate over $300 annually to charity; in 2017, households averaged $2,514 in total charitable contributions.
Corporate giving will likely increase due to the increased deductions’ benefits (and the marketing benefits of being perceived as part of the solution). In fact, to date, corporations have pledged over $4 billion to Covid-19 related causes.
How much do tax incentives matter and how can they be more effective?
In general, tax incentives only partially affect giving. The 2018 U.S. Trust Study of High Net-Worth Philanthropy found that only 17% of wealthy donors say tax benefits motivate their giving. Further, a 2018 Fidelity Charitable report found that a majority of taxpayers did not change the size of their charitable contributions in response to 2017 tax reform.
As the Covid-19 pandemic progresses, the nonprofit community is continuing to advocate for more effective incentives. On April 8, 2020, over 200 national nonprofit organizations sent a letter to Congress advocating for “Nonprofit track” legislation. The letter includes two suggestions for making tax incentives more effective:
Make incentives applicable to 2019 tax filings: Enable taxpayers to apply early 2020 donations to their 2019 federal tax filings; the tax filing deadline is extended until July 15, 2020. This adjustment will let taxpayers experience the financial benefits this year.
- Improve the above-the-line deduction: Increase $300 cap and expand the tax incentive beyond 2020.
Due to the scope and uniqueness of the Covid-19 pandemic, tax incentives are not the only factor motivating giving. According to a recent Fidelity Charitable survey, nearly 80% of donors plan to donate as much this year or more than last. Only 9% of donors plan to decrease their contributions.
Next, Check Out
Philanthropy resources to support your Covid-19 response