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 And while donating to charities is an integral component of our core values as a society, it can also be an important, strategic action toward lowering an individual's tax obligation.
This year, charitable contributions can count even more toward lowering tax bills for some. When the President signed the Omnibus spending bill on December 27, 2020, an enhanced giving option became available to American taxpayers.5
How Is the 2021 Charitable Contribution Exemption Different?
Thanks to last year's CARES Act, filers were first allowed to take a $300 above-the-line charitable giving deduction on 2020 tax returns.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 however, this above-the-line deduction could also be used by taxpayers who choose to take the standard deduction. On 2020 returns, the $300 deduction applies per filing unit, whether you are filing single or jointly. But the Omnibus bill changed the rules, offering a $300 above-the-line deduction for single taxpayers and $600 for those filing jointly on the 2021 tax return.
As a reminder, the standard deduction for 2021 is $12,550 for single and married filing separately, $25,100 for married filing jointly and $18,800 for head of household.3
Who Does This Change Benefit?
This increased exemption is not available for those who itemize their deductions, but only for those who are using the standard deduction on their 2021 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 New Tax 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 Larger 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 the Omnibus bill raised this limit to 100 percent.4 In other words, if you were so inclined, you could donate all of your income and deduct 100 percent of it in 2021 - leaving you with a $0 tax bill.
This change in the tax laws is a more subtle benefit than the direct stimulus payments which resulted from the CARES Act and the recent COVID-19 relief measure, 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 - something they are already inclined to do - and which is especially important at a time when so many people and organizations are in need.
If you have questions about this tax savings opportunity, or any other aspect of tax planning, contact your fee-only financial planner for a consultation.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.