Under the law known as the Tax Cuts and Jobs Act, P.L. 115-97, the rule that limits the charitable deduction to 50% of the donor's charitable contribution base increased to 60% for tax years beginning after Dec. 31, 2017, and before Jan. 1, 2026 (for cash contributions to public charities and private operating foundations). For 2020 only, this limit has been raised to 100% under Section 2205 of the CARES Act for qualified contributions (cash donations to a public charity that is not a donor-advised fund or a supporting organization that the taxpayer elects to treat as qualified contributions).
While the percentage limit has been temporarily increased to 100% for qualified contributions, taxpayers can make the qualified contribution election separately for each contribution and thus do not have to elect to treat all of their charitable contributions that would otherwise qualify as qualified contributions if they would not receive a tax benefit from doing so. For example, assume that a taxpayer has adjusted gross income (AGI) of $150,000 in 2020 and has itemized deductions of $10,000 of state taxes and $20,000 of deductible mortgage interest and makes cash charitable donations of $10,000 each to 15 qualified charities in 2020. The taxpayer's charitable contribution base (i.e., AGI without regard to any net operating loss carryback) is $150,000.
If the taxpayer elects to treat only three of the 2020 charitable contributions as eligible contributions for the 100% limit in 2020, the remaining $120,000 will be subject to the 60% limitation of $150,000 × 60% = $90,000. Her taxable income will be $150,000 - $10,000 (state taxes) - $20,000 (mortgage interest) — $90,000 (60% charitable limit) — $30,000 (100% charitable limit) = $0, and she will have a $30,000 charitable contribution carryover to 2021 that will be subject to the 60% limitation in 2021. The election allows the taxpayer to limit the 2020 charitable deduction to an amount less than 100% of the charitable contribution base so that taxable income does not become negative due to nonbusiness itemized deductions.
Additionally, there is a unique opportunity this year for clients with charitable contribution carryforwards to 2020. Under Sec. 170, current-year contributions are used first in determining the amount of the charitable deduction allowed in any given year. However, in 2020 under Section 2205 of the CARES Act, qualified contributions are disregarded for purposes of the limitation in Sec. 170(b), which applies to current-year percentage limitations, and the limitation in Sec. 170(d), which applies to carryovers of excess contributions from prior years.
