Giving Back During the Holidays

The holiday season is a popular time to reflect on the past year and donate to causes you care about. Donations not only aid people and organizations in need; they also confer a potential tax benefit to the giver. Recent changes to the tax code resulting from the COVID-19 pandemic have also incentivized charitable giving, leading to an increase in donations. 

Here’s a look at the tax benefits of charitable giving, recent tax deduction changes, and how you can qualify for a deduction.

Recent changes to charitable donation rules 

In response to the COVID-19 pandemic, Congress passed the CARES Act, which made some changes to how people deduct charitable donations. These changes have been extended and, in some cases, expanded for the 2021 tax year. The biggest change? The new law allows for up to $300 as an above-the-line deduction for individuals, which means you do not have to itemize your deductions to claim it. In 2020, this deduction was limited to one per tax return. Married couples filing jointly can now claim up to $600. 

Keep in mind, however, that not all donations qualify for the above-the-line deduction. Contributions to donor-advised funds, for example, don’t count; however, they can be claimed if you itemize. 

If you do itemize, you’ll be able to deduct more than in years past. The CARES Act raised the limit for itemized deductions from 60% of your adjusted gross income to 100%. Individual taxpayers can carry over any excess charitable contributions that exceed 100% AGI for five years. 

How to claim charitable deductions 

To qualify for a charitable deduction, your cash contribution must go to a qualified organization that is “operated exclusively for charitable, religious, educational, scientific, or literary purposes, or for the prevention of cruelty to children or animals,” according to the IRS. 

Qualifying organizations must also be 501(c)(3) tax-exempt as defined by the Internal Revenue Code. For example, this may include museums, nonprofit educational agencies, volunteer fire departments, and religious organizations. Many nonprofits are 501(c)(3)s, but some aren’t, so make sure you verify the status of the organization you’re donating to if you want to be able to write off your contribution. 

You can deduct charitable donations in one of two ways: by claiming up to $300 or $600 as an above-the-line deduction, or if you want to claim more than that, by itemizing your tax return. 

For many people, itemizing enough deductions to have an impact on their taxes can be tricky. That’s because the standard is relatively high. For 2021, the standard deduction is $12,550 for single filers and $25,100 for those married and filing jointly. So, if you do decide to itemize, you’ll need to be able to deduct more than this amount to make an impact on your taxes. 

One strategy to accomplish this task is known as bunching, where you combine a few years’ worth of charitable contributions into one year to help bump you over the threshold of the standard deduction. For example, if you usually make $1,500 worth of donations per year, you could combine three years’ worth of contributions to deduct $4,500. You can then take a couple of years off from making donations during which you’d take the standard deduction. Alternating in this way can help you maximize your deductions and offset a particularly big tax bill in one year. 

Any charitable contribution to an organization in need is an act you can feel good about, and with a bit of planning and the right strategy, you can give to the causes that are most important to you while also maximizing your tax benefits.

Sources:

https://www.irs.gov/charities-non-profits/charitable-organizations/charitable-contribution-deductions

https://giving.stanford.edu/stories/cares-act-extension/

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