As year 2020 comes to an end, it is a good year to make gifts for some due to the CARES Act and potential future law changes – unless there is a possibility of applying for certain public benefits within an applicable “lookback period”.
Due to the pandemic, there are certain incentives to give to charities in year 2020 only including:
1. Individuals who do not itemize can get up to $300 deduction in addition to the standard deduction.
Due to the increase in the standard deduction several years ago, most Americans do not itemize. As a result of many Americans being either unemployed or having reduced income due to the pandemic, it is likely most charitable giving will be reduced this year. Thus, the CARES Act permits a deduction of up to $300 for year 2020 only for cash (not property) contributions to a qualifying charity in addition to the standard deduction. Contributions to a donor advised fund do not qualify.
2. Charitable contributions limit increased to 100% of AGI for those who itemize.
The CARES Act permits individuals to increase their charitable cash (not property) contributions from 60% of adjusted gross income (AGI) to 100% of AGI for those taxpayers who itemize. If contributions exceed 100% of AGI, it can be carried forward for future years. Thus, for some (especially if the charitable gift is not from a retirement account as described below), this may be a good year to bunch charitable gifts (giving amounts in that were to be given in 2021 in year 2020 in addition to the contribution that was going to be given in 2020) due to the increase limitation.
3. No required distribution from IRA this year, but if you do and don’t need income, then consider gifts directly to charity
Although the CARES Act does not require a minimum distribution for year 2020, if you are concerned about an increase in future income tax rates and if you are charitable, then you could consider a direct distribution from your IRA to the charity (if you are over 70 ½). Although this is not an itemized deduction, it would not be included as part of your income (distributions from retirement accounts are income taxed) thus reducing your IRA balance. President-elect Biden has proposed a higher income tax (37% to 39.6%) for individuals whose annual income is $400,000 or more. The limit for the withdrawal directly to the charity is $100,000. If you are unconcerned about an increase in your income tax rate and do not plan on making a required minimum distribution from your retirement account in 2020, then you can consider bunching (not making the contribution from the retirement account in year 2020 and making more of a contribution in year 2021) charitable contributions next year when it is anticipated minimum distributions will again be required. As indicated above, although you would not be receiving a deduction for your charitable donation, you would not be income taxed on the direct distribution from the retirement account.
4. Consider gifting appreciated assets such as stock.
Instead of paying the capital gains tax on the sale of an appreciated asset (i.e., stock, or mutual funds), consider giving the stock directly to the charity. The charity (or donor advised fund) could then sell the appreciated asset received. As a result, you would get the charitable deduction on the stock at its appreciated price (if you itemize) without paying capital gains tax.
Gift and Estate Tax Planning:
Although an individual can continue to give up to $15,000 per year per person without reporting to the IRS and although the lifetime gift and estate tax exemption (which requires the donor to report) is increasing from $11.58 million to $11.7 million in 2021 (increasing from $23.16 million to $23.4 million per year for married couples jointly), some are concerned about President-elect Biden’s proposal to reduce this amount to $3.5 million ($7 million for a married couple filing jointly) that possibly could be retroactive to January 1, 2021. As a result, some wealthy taxpayers are considering making large gifts now (see article in our November newsletter entitled “Potential Tax Ramifications of the 2020 Election on Individuals”) since there is no claw back. For example, if one has a large estate and has not made gifts exceeding the annual exclusion previously, that individual donor could technically make a gift (which should be reported to the IRS) of $11 million in year 2020 without being taxed on the gift.
CAVEAT: Penalty if applying for certain Medicaid or VA benefits:
One of the most common misconceptions is that one could always make gifts subject to the rules above without effecting eligibility for public benefits such as certain Medicaid and VA benefits. Public benefits are often “means-tested” (the government looks at resources of the applicant prior to granting benefits). As a result, the government has anti-fraud measures in place to prevent an applicant from simply giving away their resources so that the government would pay for benefits such as home care, assisted living or nursing home or drug costs that Medicare does not cover. There are over 100 Medicaid programs in Texas and each program has its own rules, including different rules on penalties for gifting (some programs do not have a penalty) within the applicable “look-back” period. For example, long-term care Medicaid determines the amount of days of ineligibility by dividing the average daily cost for skilled care into the amount of the uncompensated transfer if made within five (5) years of the application. Veterans (or their surviving spouse) who served during wartime who become disabled later in life (unrelated to the military service) and need assistance with two (2) activities of daily living or are homebound are subject to a 3-year look-back period for gifts with the divisor being the amount of the monthly benefit the veteran would receive. Notwithstanding the Medicaid and Veterans benefits laws, elder law attorneys often use transfer planning strategies permitted by law to achieve eligibility in a quicker time frame to preserve resources (even if within the applicable look-back period).
If interested in learning more about this article or other estate planning, Medicaid and public benefits planning, probate, etc., attend one of our free upcoming virtual Estate Planning Essentials workshops by clicking here or calling 214-720-0102. We make it simple to attend and it is without obligation.