People have plenty of compelling reasons to donate money this year 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 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.
People who want to take the $300 deduction should remember a couple of points about the fine print:
1: The same $300 write-off applies whether it’s a single taxpayer or a married couple filing jointly.
2: 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.
3: 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.
At the end of the day, the tax savings may be modest. But charitable donations aren’t about a tax play. However, it is a little added incentive to make at least $300 in donations by year end.
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.”