Though precious few things in modern life can be classified as a "win-win," a charitable donation is unquestionably one of them. For the charitable entity, your donation keeps their organization and noble endeavors afloat. And for you, the benefits are two-fold: the innate satisfaction of having done good -- and the tax deduction that follows.
As with so many things in this strange year of 2020, however, the rules and protocols for charitable donations -- and their tax ramifications -- have changed. Under the CARES Act, which kickstarted an array of initiatives to address the coronavirus and its attendant economic and social fallout, the IRS has tweaked its eligibility requirements -- expanding the pool of tax filers who can claim the charitable deduction as well as the cash value limit and donation timeframe for tax year 2020. Read on for all the details.
What is the charitable tax deduction?
The IRS allows you to reduce the amount of your income that's taxed when you spend on certain activities such as paying interest on a mortgage, paying interest on a student loan or making a charitable donation. In the past, many of these deductions were available only to filers who itemized their deductions -- that is, who opted out of the standard deduction (a flat $12,400 for single filers and $24,800 for married filing jointly) to take the more complicated -- but potentially more lucrative -- path of documenting all their eligible expenses.
Until recently, most people who itemized could deduct approximately 60% of their adjusted gross income for donations made to a qualified charity. Simply put, a single filer making $100,000 in income could deduct $60,000 in qualified charitable donations from that amount, and calculate her taxes on the remaining $40,000 of income -- which would significantly reduce her tax burden.
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What's changing from tax year 2019 to tax year 2020?
- Standard deduction-takers now qualify. The CARES Act included a provision to expand access to the tax benefits of charitable donations. Section 2014 of the Act changed the rules so that eligible individuals who do not itemize deductions can now deduct $300 in charitable donations from their adjusted gross income. That's a nice little bump for taxpayers who want to keep things simple, and it's brand new for tax year 2020.
- But there are limits. Note that if you don't itemize on your return, you can't carry forward into subsequent years a donation that exceeds $300, nor can you claim donations made before 2020.
- For itemizers, the upper limit has increased. If you are itemizing on your return, however, the IRS has increased the limit for charitable tax deductions from 60% to 100% of your AGI. (A corporation may now deduct qualified contributions of up to 25% of its taxable income.) Note that high-net-worth individuals who are donating from the more esoteric asset classes will need to work through the details with an expert.
- And the timeframe has also expanded. For itemizers, contributions above that 100% threshold may be carried over into the next tax year. Arguably, there's never been a better time to give to charity.
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Which organizations are eligible for your tax deductible donations?
Though you can give money (or other types of donations) to anyone you choose, only qualified organizations are eligible to confer tax deductible status -- and the IRS maintains a database of them. If you plan on claiming a deduction against a donation you've made, confirm its status first.
No, political parties are not considered charities
Despite some politicians' desire that it were otherwise, the IRS leaves no doubt that donations to candidates and political parties are not tax-exempt. In fact, to remain in good standing as an entity that's eligible to receive tax-deductible donations, organizations may not participate -- directly or indirectly -- in any political campaign or activity. There are, however, a few exceptions: organizations that support voter registration and encourage voting itself are not prohibited -- as long as they avoid a partisan bent.
Read more: Before you give: How to vet a charity
What other changes to the charitable tax deduction are on the table?
There are a number of other pending bills, including the Universal Giving Pandemic Response Act, which would further and significantly expand the charitable deduction -- to more than $4,000 for single individuals and more than $8,000 for married individuals filing jointly. Like so much other proposed legislation, it currently remains stuck in the quagmire of Congress.