The COVID-19-triggered financial recession underscores for businesses and individuals the need to hold sufficient cash to ride out the tumult. For individuals with cash, or access to it, there are planning opportunities. With the equity markets well off their highs, now is an especially attractive time to consider a Roth conversion as part of retirement income planning. Those converting almost always have sufficient cash held outside the IRA to pay the taxes attributable to the conversion.
For the converters with philanthropic goals, they may also wish to consider zeroing out their federal income tax liability. The CARES Act allows taxpayers in 2020 to elect to deduct gifts up to 100% of AGI provided those gifts are made with cash to public charities.
Could a donor eliminate their federal income tax liability for 2020 without giving up to 100% of AGI? The short answer will be yes. The most generous charitable donors usually itemize and are also likely to have substantial mortgage interest expense—and perhaps investment interest expense. Their state and local taxes are currently capped at $10,000.
As noted in the chart below, the more tax-efficient strategy would be to contribute up to their taxable income before reducing for charitable contributions. The chart shows giving to 100% of AGI likely will not be needed to eliminate their income tax liability. While any excess contribution could be carried forward, the filer actually parted with more cash than was needed. Now is the time most donors will be looking to conserve cash.
Financially savvy and philanthropic donors should keep the expanded deductibility top of mind as they are contemplating Roth conversions, which are especially attractive in down capital markets or if they have received a Golden Parachute payment. The goals of guiding others through their giving and seeking charitable support can be compatible.
By Professor Chris Woehrle, Chair & Professor of Tax & Estate Planning Department, College for Financial Planning, Centennial, Colorado
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