New Tax Benefits for 2020 Charitable Giving
By Matt Konrad
With the COVID-19 pandemic continuing to take a toll on Americans’ health, economic well-being and social lives, the nation’s charities have become a vital source of assistance for millions. Nonprofits across the country are doing all they can to help those in need – and they need support from those who are able to give this holiday season.
Fortunately, the IRS has implemented a few changes to its code for the 2020 tax year, designed to encourage and reward charitable giving with tax benefits. If your financial situation is stable enough to make a year-end gift or two, here’s how it can help your favorite charity and your bottom line.
A Universal Deduction Via the CARES Act
When the 2017 Tax Cuts and Jobs Act (aka “the tax reform bill”) passed, one of the major changes to the tax code was the doubling of the standard deduction, to $12,400 for those filing single and $24,800 for those married filing jointly. This change almost immediately led to a sharp decrease in the number of taxpayers who itemized deductions; as CNBC reported, only about 10% of taxpayers itemized, compared to around 30% before 2018.
The reduction in itemization led to a drop-off in charitable giving over the last two tax years, since contributions can generally be written off only when itemizing. However, a new, universal “above-the-line” deduction, implemented as part of the COVID relief legislation known as the CARES Act, allows everyone to deduct up to $300 in charitable contributions – even if you’re taking the standard deduction.
Following special tax law changes made earlier this year, cash donations of up to $300 made before December 31, 2020, are now deductible when people file their taxes in 2021.
“Our nation’s charities are struggling to help those suffering from COVID-19, and many deserving organizations can use all the help they can get,” said IRS Commissioner Chuck Rettig. “The IRS reminds people there’s a new provision that allows for up to $300 in cash donations to qualifying organizations to be deducted from income. We encourage people to explore this option to help deserving tax-exempt organizations – and the people and causes they serve.”
Under this new change, individual taxpayers can claim an “above-the-line” deduction of up to $300 for cash donations made to charity during 2020. This means the deduction lowers both adjusted gross income and taxable income – translating into tax savings for those making donations to qualifying tax-exempt organizations.
As summed up in this explainer from Kiplinger: “In short, with the CARES Act, if you donate up to $300 in cash to a qualified organization, your adjusted gross income will be reduced up to $300.”
If you’ve made up to $300 in charitable gifts this year, you can claim this simple deduction at tax time. And if you haven’t done so, now is a perfect opportunity!
An Added Benefit for Itemizers
The 10% or so of taxpayers who are itemizing deductions can take advantage of another benefit introduced by the CARES Act: the temporary lifting of restrictions on the percentage of adjusted gross income (AGI) you can deduct. From Kiplinger:
“[F]or those who itemize deductions for 2020, you can deduct charitable contributions of up to 100% of your AGI (adjusted gross income). That’s up from the 60% that was allowed under TCJA. This means that for 2020 if your AGI is $250,000, you can deduct $250,000 in charitable contributions.
“While the ultimate goal of the universal deduction is to help smaller organizations, this extension for deductions could be an additional incentive for wealthy donors to continue giving this year.
“The CARES Act has also increased the amounts of annual charitable deductions for corporations from 10% of taxable income to 25%. Any donations that are greater than 25% can be deducted within the following five years.”
Again, while the $300 universal deduction applies to all taxpayers across the board, this change in deductible percentage only impacts individuals who itemize and corporations. It’s a specialized situation, but if you’re in the position to make a large charitable gift, it means now is the most tax-advantaged time to do so.
As we look toward a year of recovery, America’s nonprofits need all the support they can get – and these new tax rules are just two more incentives to helping your fellow citizens make it through 2020.