What Does the 100% Deduction Rule Mean to You in 2020?
For the definitive guide on tax-smart giving strategies in 2020, download the PDF below. Discuss this with your financial advisor and start planning now. These strategies are limited to the 2020 tax year only.NCF-California-CARES-Act-Bryan
Bryan: Hey, everybody. Welcome to The Bob and Bryan Show. Today, we’re talking about 100% deduction, and Bob, you’ve been doing the happy dance lately about this 100% deduction. Why all the excitement?
Bob: You know, Bryan, the happy dance is a little bit over the top, but it is pretty interesting. And it grows out of this terrible Coronavirus crisis, which for the working poor has just been a disaster – 40 million people filing for unemployment. There’s a silver lining, though, in the government response called the CARES Act.
The CARES Act, for the first time in US history, creates a 100% income tax charitable deduction. So you can make a charitable deduction and take it against all of your income. First time ever. And that silver lining is a real benefit to a lot of wealthy people who have just not been badly hurt in this crisis. The stock market is down less than 10% year-to-date. Most high-income earners are still getting paid.
So for believers, people like us, this is just an incredible opportunity to put love in action by supporting ministries that care for those who are struggling and out of work.
Bryan: So why is the CARES Act opportunity different from any other opportunity that we typically talk about at NCF?
Bob: Well, the difference is that a 100% tax deduction effectively allows generous people to give from assets that they can’t normally reach because of the tax consequences.
Bryan: So give me some examples.
Bob: Pension plans, 401K plans or IRA accounts, employee stock options, or selling low-basis real estate. All of those things, when you access them create income. So you take money from a pension plan or an IRA, or you exercise employee stock options – that’s ordinary salary income, and it’s taxable as such. In the normal world, even if you give it away you only get a 50% deduction. So the tax cost keeps you from accessing those funds.
Bryan: Okay, so break it down for me, ones and zeros.
Bob: Well, it’s pretty simple. The donation has to be paid in cash. The only limitation is the amount of your adjusted gross income, reduced by any charitable giving that you have already done. And then two other requirements: 1.) It has to go to a normal public charity. It can’t go to a donor-advised fund, and 2.) this is for this year only – 2020 only. So this 100% deduction exists only between now and the end of the year.
Bryan: Okay, so how does the CARES Act 100% deduction relate to the standard deductions that we’re used to talking about and taking?
Bob: Well, the good news is that this CARES Act deduction is in addition to all of the normal charitable deductions, so you can still gift assets. You can still use a giving fund at National Christian Foundation for up to 60% of your adjusted gross income (AGI). And if you happen to give more than 100% of AGI this year, the excess carries over to future years, just like it always does. The only added requirement is that that last 40% has to be in cash, has to go to charity, and has to be done this year.
Bryan: We’re talking about cash, but how does that actually give us access to assets?
Bob: Well, the connection is that you can take, let’s say, a withdrawal from a pension or a profit-sharing plan. That’s your asset. When you pull the money out, convert it to cash, it becomes taxable income. But if you turn around and donate that cash, it’s all deductible. Same thing. You have employee stock options or restricted share units. That’s your asset. But if you exercise those options or cash in those share units, get the money, it’s all salary income. Make the donation; the income goes away for tax purposes. So that 100% deduction lets you convert an asset to cash, no matter what the tax consequences are, and make the tax go away.
Bryan: So what we’re saying is the non-intuitive strategy here is to plus-up your income as high as you can, because you can give all of it away with no tax consequences.
Bob: Exactly. If you want to do charitable giving, you can reach any of your assets this year, and it’s just an enormous one-time opportunity.
Bryan: Nice. Well, I think a lot of people should be doing the happy dance who are NCF givers. So there’s definitely going to be more content coming out, so stay tuned to The Bob and Brian Show for future episodes where we take a deep dive into some of these things.
Thanks for watching, and we’ll see you all next time.
Bob: All right, Bryan. Thanks.