A Gallup poll recently found that 73% of Americans gave to charity over the past year (this is down nearly 10% from two years ago). And well over half of American donors make their gifts to charity in the final weeks of the year. If you’re in that group, you might want to know about some recent changes to the tax code affecting charitable giving. Most of these changes were part of the CARES Act that was passed as a result of the COVID-19 pandemic and only last through the end of 2020. They include:
• If you take the standard tax deduction (and do not itemize your taxes), you are eligible for a modest deduction of up to $300 for cash contributions to charity. The deduction is tied to tax returns and not to individuals, so a married couple filing a joint return is also only eligible for a $300 deduction. This deduction is limited to cash contributions, not donations of clothing or household goods. Donations to donor advised funds are also not eligible. To prove that you’ve actually donated, you should seek a written acknowledgment from the charity that shows the date of the contribution and the contribution amount.
• If you itemize your taxes, you can deduct charitable contributions on Schedule A of your tax return. For 2020 alone, you can deduct charitable gifts that equal up to 100% of your adjusted gross income (in normal years, you’re only allowed to deduct 60% of your AGI). Donations to donor advised funds are not eligible for the higher limits.
• A law that is not new, but is often unknown to many taxpayers, centers on your IRA. IRA owners who are 70 ½ or older can contribute up to $100,000 directly to charity and the contribution counts toward your required minimum distribution. For 2020, the IRS is not requiring taxpayers to take a required minimum distribution, but a gift to charity from your IRA will ultimately lower the amount of future required distributions, so this is a good deal. To make this work, you must transfer the money directly to the charity.
As always, you should seek the advice of your financial advisor before making significant year-end tax decisions.
One other bright spot from the Gallup survey: 25% of taxpayers plan on giving more to charity in 2021. Better days are ahead!