On March 27th, 2020 the estimated $2 trillion Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law, receiving nearly unanimous bipartisan support. The overarching intention of the CARES Act was to provide economic stimulus to struggling individuals and businesses through cash payments, tax credits and loans. Of particular importance for investors, there were a number of material changes to existing tax requirements that sought to provide added flexibility during these challenging times.
One of the lesser-known features of the law, however, were specific changes related to the treatment of charitable contributions. Prior to the CARES Act, the Internal Revenue Service (IRS) would allow individuals to take a tax deduction on cash contributions to charities up to 60% of the individual’s adjusted gross income (AGI), meaning for every $100 you gave to charity, you could subtract or deduct $60 from your taxable income and thus, reduce the taxes you owe. Under the new rules, you may now deduct up to 100% of your AGI — this is particularly powerful for high-income earners who are charitably minded in that they can receive additional tax savings through giving.
Moreover, for those with traditional retirement plans, you can take advantage of this benefit in tandem with what is known as a Roth Conversion. The primary difference between a Roth and Traditional Individual Retirement Account (IRA) is that Roth plans are tax-exempt, meaning when you pull money out upon retirement, you don’t have to pay any tax. Many people prefer Roth IRAs because they allow your investments to grow tax-free; however, these accounts are typically not available to high-income earners. Simply put, by undergoing the conversion, the same individuals benefit threefold from the CARES Act — namely, by providing assistance to a public charity of their choosing, receiving 40% additional tax savings, and converting their retirement account without having to pay additional taxes.
Although we are in the early days of investors navigating through this process, the expectation is that churches, hospitals, medical research organizations, colleges and universities will all see some incremental benefit from such changes. Should this become an area of interest, it is worth consulting a tax advisor to step through the mechanics.
This article was written by Kyle McIntyre, Wealth Management Associate. As a wealth management associate, Mr. McIntyre assists families with portfolio construction, asset allocation, and performance reporting. Prior to joining Canterbury, he was part of the portfolio management group at Hall Capital Partners, working closely with family clients and their offices, accountants, and investment managers, and he completed a research internship with Trillium Asset Management. While at Brown University, Mr. McIntyre established the Sustainable Investment Fund within the Brown Endowment and chaired the Climate Action League. He graduated with a Bachelor of Arts in geology-physics/mathematics from Brown University.
Bortz, Jason and Anderson, Reagan. CARES Act: What investors and small businesses need to know. (Capital Group, accessed Oct. 7, 2020.)
The CARES Act Works for All Americans. (U.S. Department of the Treasury, accessed Oct. 7, 2020.)
Public Charities. (Internal Revenue Service, accessed Oct. 7, 2020.)