What’s New With the 2021 Enhanced Charitable Deduction?

Charitable giving benefits your community, organizations close to your heart, and families that need a helping hand. In addition to the social benefits, charitable giving can offer potential tax breaks. But, to take advantage, a household must often itemize their deductions. The CARES Act of 2020 changed that status quo. Even if you take the standard deduction, you may be eligible to claim up to a $600 deduction on your 2021 tax return (filed in April 2022). But fair warning, this 2021 benefit looks quite different from the one in 2020. Here’s how it works. 

The 2020 Above-The-Line Deduction

To encourage charitable donations in a time of particular economic and social distress during the pandemic, Congress added a provision in the CARES Act that permitted taxpayers to take an additional above-the-line deduction on cash gifts up to $300, no matter their filing status. Above-the-line deductions enable taxpayers to reduce their adjusted gross income (AGI) without itemizing. Yes, you read that right. You don’t have to itemize to take advantage of above-the-line deductions. Lowering your AGI comes with a whole host of tax benefits, including mitigating your total liability, and could qualify you for certain tax credits. What’s the difference? 

• Tax Deduction: Lowers the amount of your income subject to taxes.

• Tax Credit: Directly reduces the amount of tax you owe on a dollar-for-dollar basis; generally considered more advantageous than tax deductions.

Above-the-line deductions may include retirement plan contributions, health savings account (HSA) contributions, student loan interest, alimony, moving expenses (armed forces), self-employed business expenses, and much more. On the other hand, itemized deductions (below-the-line) include property taxes, mortgage interest, state and local taxes, real estate expenses, medical expenses, charitable contributions, and a few other big-ticket categories. You can either take the standard deduction or itemize—whichever will save you the most money.

What’s the 2021 Standard Deduction?

We’ve talked much about the standard deduction—but what is it? The standard deduction is a number set by the IRS that reduces your taxable income. When tax time comes, you can either take the standard deduction or choose to itemize your deductions, whichever is higher. However, itemizing has become more of a challenge since the Tax Cuts and Jobs Act raised the standard deduction limits. In 2021, the standard deduction is as follows:

• $25,100 for married couples filing jointly

• $12,550 for those filing single

• $18,800 for heads of household

If you don’t have enough expenses to itemize, you will likely take the standard deduction, which can cut charitably inclined people from receiving tax benefits from their gifts. But there’s a new opportunity this tax year. 

What Are the Changes for the 2021 Charitable Deduction?

A temporary provision in the CARES Act of 2020 allows taxpayers to deduct cash contributions on their 2021 tax return to qualified 501(c)(3) charities. Single filers and those married filing separately can deduct up to $300. That limit doubles to $600 for those married filing jointly. A cash contribution may include:

• Check

• Credit or debit cards

• Unreimbursed expenses if connected with volunteer services (note: volunteering itself doesn’t count)

Since this is a cash-only deduction, contributions to a donor-advised fund won’t qualify. But the charitable write-off this year isn’t an above-the-line deduction like it was in 2020. Whether you itemize or not, you can take the deduction, but taking advantage of it won’t impact your adjusted gross income. 

Steps To Claim the CARES Act Tax Deduction

While donating to charity and reaping the tax benefits can seem daunting, it doesn’t have to be. Below are the steps you can take to get this deduction:

1. Make a cash contribution in the 2021 tax year. “Cash” could be cash, check, electronic funds transfer (EFT), or payroll deduction.

2. To cover your bases, retain receipts or acknowledgment letters for your records. This will also keep you organized come tax filing season.

3. Claim the amount on your tax return in the Schedule 1 Tax Form

Remember that this tax deduction does not apply to “non-cash gifts,” such as clothes, furniture, etc., to Goodwill, Salvation Army, or other organizations.

What Charities Should You Support?

You should tie your charitable giving efforts to your goals, values, and beliefs. But how can you decide where to donate to? Consider the following questions. 

• What change would you like to see in your community and the world?

• What causes are important to you?

• Where will your gifts (time, money, resources, etc.) have the most significant impact?

We’re also passionate about charitable giving at the Dala Group and are donors to a local charity, Fellowship Housing. This is an incredible organization that empowers single mothers to establish a new legacy for their families. They provide women with a path to homeownership and foundational financial support that helps them achieve independence.Financial literacy is instrumental in helping people reach financial freedom. And we are committed to supporting organizations doing incredible work in the community to spread financial literacy to others. 

Charitable Giving Or Tax Planning Questions? We Can Help.

Charitable giving can be an essential part of many people’s financial plans. While the primary focus of giving is to support causes you care about, it’s also excellent to do so in a tax-conscious and friendly way. This charitable deduction is one example. Tax planning weaves its way into every area of your money, from charitable giving to investing to estate planning and more. We are committed to working with you in a comprehensive manner so you find confidence in your entire financial plan. We would love to help you optimize your financial plan and make sure that you are not missing out on the tax-saving strategies available (such as the one discussed above). Reach out today.