People have plenty of compelling reasons to donate money this Giving Tuesday if they can afford it, but a handy tax code tweak enacted earlier this year provides one more incentive.
The so-called “universal charitable deduction” allows non-itemizers to claim a tax break of up to $300 when they file their taxes in 2021.
Let’s break that down.
Charitable donations are tax deductible, but taxpayers can only claim the deduction on their federal income taxes if they’re itemize the expenses that are eligible for deductions. Along with charitable donations, these expenses include medical expenses, mortgage interest and state and local taxes (up to $10,000).
But it only makes tax-savings sense to itemize if those expenses total more than the standard deduction, which reduces a tax bill by a set amount. This upcoming tax season, the standard deduction will be $24,800 for married couples filing jointly and $12,400 for single taxpayers
More than 87% of tax returns filed last year took the standard deduction, according to Internal Revenue Service statistics.
The universal charitable deduction allows taxpayers to claim the standard deduction, and then also take a write-off of up to $300 on top of that for the eligible donations they make on or before Dec. 31, 2020. The deduction was one part of the $2.2 trillion CARES act passed in March.
Suppose a household has $75,000 in taxable income after applying the standard deduction. Tacking on $300 deduction will shave $36 from the income tax bill, said April Walker, lead manager for tax practice and ethics at the American Institute of Certified Public Accountants, a professional organization.
A household with $100,000 in taxable income could save $66 by claiming the whole above-the-line deduction, according to her calculations.
“It’s not motivation to give. It’s what gives people the ability to give more,” said Rick Cohen, spokesman and chief operating officer for the National Council of Nonprofits. “Right now, every dollar counts. It doesn’t matter if it’s $300, three dollars or $30,000. Nonprofits need every penny right now.”
Across the country, donations have “been on a bit of rollercoaster this year,” he said. They dipped in the first quarter as COVID-19 beared down on the economy, but then rebounded in the second quarter.
By the first half of the year, donations were up 7.5% compared to the same point last year, partly boosted by a spurt in contributions under $250, according to the Fundraising Effectiveness Project, which is a carried out by the Association of Fundraising Professionals.
Donation estimates for the third quarter are pending, but Cohen said, “what we are seeing and hearing anecdotally is the rollercoaster has gone back down” as the pandemic wears on and makes some would-be donors question whether they can afford to give.
“When you have that kind of uncertainty, it’s quite understandable to be a little bit less inclined to give as much as you would,” he said.
People who want to take the $300 deduction should remember a couple of points about the fine print, said Walker, with AICPA.
The same $300 write-off applies whether it’s a single taxpayer or a married couple filing jointly, she said.
The deduction applies to money contributions, not tangible donations — like a pile of clothes from a cleaned out attic. It also doesn’t apply to donations of stock, Walker noted.
If a taxpayer donates $250 or more at one single time, they will need a contemporaneous written gift acknowledgment from the organization that received the gift. This is pre-existing IRS rule on reporting requirements, Walker explained.
At the end of the day, the tax savings may be modest by Walker’s calculations. But donations aren’t about a tax play. “It is a little added incentive to make at least $300” in donations, she said.
IRS Commissioner Charles Rettig recently reminded taxpayers about the provision, saying, “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.”