Giving back is as American as owning a home. In 2017 alone, we gave over $410 billion in charitable donations - With the 2020 holiday season officially upon us, there should be no surprise that our giving efforts will likely skyrocket. And while donating to charities is an integral component of your core values - it can also be extremely valuable from a strategic point of view, in lowering your tax obligation.
Thanks to the CARES Act, charitable contributions this year, can count, even more, toward lowering tax bills for some. With the CARES Act, passed in late March 2020 in response to the coronavirus pandemic, your giving could stretch even further this tax season.
How Is The 2020 Charitable Contribution Exemption Different?
Thanks to the CARES Act, filers will be allowed to take a $300 above-the-line charitable giving deduction.1 This is significant because, typically, you would have to itemize deductions in order to deduct charitable donations from your taxes. For more on the difference between above-the-line deductions and itemized deductions click here.
With changes introduced through the CARES Act, you can still utilize this deduction, even if you choose to take the standard deduction. The standard deduction for 2020 is $12,400 for single filers and married filing separately. It is $24,800 for married filing jointly and $18,650 for head of households.2
It’s important to note that the $300 limit is per filing unit, whether your filing single or jointly.
Who Can Benefit From This CARES Act Change?
Those of you who are taking the standard deduction on their 2020 tax returns, it is not available to you if you are going to itemize deductions on your return.
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.
If you are in the majority of tax payers today, meaning you elect to take the standard deduction (9 out of 10 filers), you 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 organizations as outlined in section 170(c) of the Internal Revenue Code.2
What About Regular Charitable Contributions?
In the past, if you itemized your deductions, you could only deduct up to 60 percent of your AGI in charitable contributions. In 2020, this limit has been raised to 100 percent.3 If you are extremely philanthropic this may be of massive importance to know.
If you were so inclined to do so, you could donate all of your income and deduct 100 percent of it! - that would ultimately leave you with a $0 tax bill.
This new relief benefit is much more subtle than many of the other aspects included in the CARES Act, but it can still provide financial relief to families. This change gives you the opportunity to be charitable while at the same time lowering your AGI without needing to cross the high threshold needed to itemize deductions. It incentivizes Americans to give charitably this season, which is especially important at a time when so many of our fellow Americans are in need.
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