Planning

CARES ACT 2020 Year End Planning Considerations

The CARES Act was signed into law on March 27, 2020 in response to the economic carnage resulting from much of the US and global economy being closed due to the Coronavirus pandemic.  We have touched on parts of the relief act in previous articles.  As we enter fall and the year draws to a close, it is worth mentioning some additional planning ideas made possible by the CARES Act.

Roth IRA Conversions:

The CARES Act has given individuals with traditional IRAs currently mandated to take the required minimum distribution (RMD) a pass in 2020.  The RMD is government’s way of forcing the tax deferred savings back into the tax regime and subject to ordinary income tax.   Normally one must take the RMD before converting any amount to a Roth IRA.  Doing both could lead to quite a bit of tax being owed to the federal and state authorities.  This is a unique opportunity to take the amount otherwise slated for RMD and put it in a Roth IRA.

A Roth IRA Conversion involves taking funds from your traditional IRA (pre-tax contributions) and putting them in a Roth IRA (after-tax contributions).  The benefit of the Roth IRA is that growth and future distributions are not subject to ordinary income tax upon distribution as they would be in a traditional IRA.  The downside to the conversion is that one must pay tax now on the amount converted and it really works best to pay this tax with money available outside of any retirement account, converting the gross not just the net after tax.  The plus side to paying the tax now is the tax rate is known and potentially lower than it will be in the future.

Any Roth Conversion should be done in close coordination with your tax preparer.   Good planning involves looking at your expected income and trying not to unintentionally subject the conversion to a higher tax rate.  Roth Conversions can be partial conversions and it is important to understand that the benefit is not realized immediately.

Charitable Deductions:

Also courtesy of the CARES Act… for 2020 only, individuals who itemize their deductions may deduct cash contributions made in 2020 to public charities up to 100% of their Adjusted Gross Income (AGI)!   This represents an increase from the 60 percent AGI limit that ordinarily applies to cash gifts made to public charities.  As has always been the case, charitable contributions in excess of AGI can be carried forward five years.

There are a few caveats to be aware of.  The excess above 60% does not apply to cash charitable gifts made to: private foundations, donor advised funds, supporting organizations, and charitable trusts.  Also, amounts carried forward from prior tax years cannot be applied in excess of 60%.

The CARES Act also allows taxpayers who do not itemize their deductions to now claim a tax deduction benefit up to $300 for cash gifts made to public charities beginning in 2020. This deduction is not available for cash gifts to private foundations, donor advised funds, supporting organizations or charitable trusts. This new deduction will not expire after 2020.

The CARES Act does not change the AGI limits for gifting appreciated stock and other non-cash assets to charity.  These assets are often the most efficient way to make a gift.  If you intend on maximizing your charitable giving in 2020, be sure to have a conversation with your advisor well in advance of year end to strategically plan.

As always, please reach out to your advisor with any questions you may have related to the above content or anything else.

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