As Americans, we love giving back. In 2017 alone, we shelled out $410.02 billion in charitable donations - accounting for 2.1 percent of the GDP.1 With the 2020 holiday season officially upon us, it’s no surprise that our giving efforts are likely ramping up. And while donating to charities is an integral component of your core values, it can also be an important, strategic play in lowering your tax obligation.
This year, charitable contributions can count even more toward lowering tax bills for some. Thanks to the CARES Act, which passed in late March 2020 amidst the coronavirus pandemic, your giving could stretch even further this tax season.
How Is This Year’s Charitable Contribution Exemption Different?
Thanks to the CARES Act, filers claiming the standard deduction will be allowed to take a $300 above-the-line charitable giving deduction.2 This is significant because, typically, you would have to itemize deductions in order to deduct charitable donations from your taxes.
With changes introduced through the CARES Act, this above-the-line deduction can be used for those who give cash to a public charity and choose to take the standard deduction. As a reminder, the standard deduction for 2020 is $12,400 for single and married filing separately, $24,800 for married filing jointly and $18,650 for head of households.3
It’s important to note that the $300 limit is per return, whether your filing single or jointly.
Who Does This Change Benefit?
This CARES Act exemption is not available for those who itemize their deductions, it’s only for those who are using the standard deduction on their 2020 tax returns.
This is significant because, historically, anyone taking a standard deduction has not been able to reduce their adjusted gross income (AGI) by claiming charitable contributions.
Nearly nine in 10 taxpayers now take the standard deduction and could potentially qualify for this new tax deduction. In tax-year 2018, the most recent year for which complete figures are available, more than 134 million taxpayers claimed the standard deduction, just over 87% of all filers, according to the IRS.
What Donations Count Toward the CARES Act Deduction?
Just as any other charitable contribution deducted from your taxes, eligible donations must be made to qualified 501(c)(3) organizations or any other qualified organization as outlined in section 170(c) of the Internal Revenue Code.2
What About Regular Charitable Contributions?
In the past, those who itemize their deductions were able to deduct up to 60 percent of their AGI in charitable contributions. Those who are extremely philanthropic may be interested to know that this limit has been raised to 100 percent.4
If you were so inclined to do so, you could donate up to your adjusted gross income in 2020 and elect to deduct 100 percent of it - leaving you with a $0 tax bill. However, this may not be the most advantageous election over a multi-year tax bill. It is recommended to check with your CPA or Advisor regarding multi-year tax planning and traps.
This relief benefit is more subtle than other aspects of the CARES Act, but it can still provide financial relief to families. This change gives families and individuals an opportunity to lower their AGI without needing to itemize deductions - something that low- to moderate-income families may not typically do. It incentivizes Americans to give charitably this season, which is especially important at a time when so many people and organizations are in need.