Charitable giving in the time of Covid
Imagine your financial house is like an apple tree. Hanging on the tree are the fruits of your labor or good fortune. Although many people are finding 2020 to be a bad harvest as their jobs or businesses were impacted by COVID-19, there are others whose trees are full. If you find yourself in such a position, or if you just value sharing whatever fruit you have, it is worth reading on. This blog is a brief, and to-the-point, description of the deduction and some thoughts on whether you should put more thought into a giving strategy.
This year, there is a new tax deduction for charitable giving. The new deduction was part of the 2020 CARES Act, and to be honest, I’d forgotten about the new deduction until just recently when a client reminded me while doing year-end tax planning. The deduction is small; it does not deserve the hyperbolic praise-rhetoric so in fashion today, (like “huge” or “tremendous”). In contrast, the deduction is simple, clean and efficient. It provides us all a little incentive to be generous with little bureaucratic oversight. I like such governmental policies.
A $300 above-the-line deduction for all
This year, if you give at least $300 in cash to a qualified non-profit, you will be eligible for an above-the-line tax deduction of up to $300. For taxpayers in the 22% marginal tax brackets (a single person with more than $40,126 in taxable income or a couple with over $80,251), the deduction would reduce the taxes owed by $66. The deduction is available to people even if they claim the standard deduction. If you haven’t made a donation this year, or you stopped keeping track of your donations because you weren’t receiving any tax benefits in recent years, make sure you keep a record of at least $300 for this year.
Typically, when I make a generalized tax recommendation, I always follow it with the advice, “you should consult your tax professional to see if this situation applies to you.” Although still good advice, we are talking only about $66, so it’s probably not worth spending calling your CPA. Just donate it, and keep the record.
Wait, haven’t charitable donations always been tax-deductible?
Yes, charitable donations have always been “deductible” on a personal tax return. That fact has not changed. However, since the passes of the Tax Cuts and Jobs Act (TCJA) in 2017, the benefit of claiming charitable deduction was all but eliminated for low- and middle-income households. Read on for a tax-dive into why. Be warned, I am going to write about math and taxes. The read may act like a double-swig of Nyquil.
Charitable donations are recorded on Schedule A, the form which collects all deductions (including expenses like mortgage interest, state/local taxes and medical expenses). The total allowed deductions on Schedule A are also known as Itemized Deductions. Your Itemized deductions are compared to the appropriate Standard Deduction for your filing status. You get to use the larger of the two to reduce your taxable income.
Prior to the TCJA, many taxpayers had enough deductible expenses to exceed the standard deduction. However, the TCJA essentially doubled the standard deduction. For two people filing as a couple, the standard deduction went from $12,700 to $24,000. This move rendered itemizing a worthless strategy for many middle income households. This is particularly true in Washington state where there is no state or local income tax. You’ve got to own a pretty big house, or have a pretty high interest rate mortgage for mortgage interest and property taxes to add up to nearly $24,000. As a result, many people stopped itemizing, which removed any tax benefit associated with charitable donations.
So, although charitable donations remain deductible, middle income folks tended to no longer benefit from the deduction. Interestingly, according to the Tax Foundation, overall US giving to charity did not decrease as a result of the TCJA, which buoys my faith in humanity (source: ).
A gifting strategy
If you give much larger amounts, or you are considering such, there are many strategies to be both gift- and tax-efficient (delivering the most to the beneficiary with lowest taxes). For example, if you itemize deductions, the CARES Act has increased the limits on how much cash donation may be deducted (from 60% of AGI to 100% of AGI). Donations can be bunched in a multi-tax year strategy. You can consider lifetime gifts. You can donate retirement account assets or appreciated securities. Individual goals and circumstances will dictate the strategy appropriate for you. If you find yourself wondering the best way to give larger amounts, I would highly encourage you to consult with your CPA or financial advisor to develop a strategy.
Last week was Thanksgiving, last Tuesday was the “National Day of Giving.” Here at Trail Financial, November through December is the season of year-end tax planning. Tax planning is one element of your financial life. As comprehensive, or holistic, financial planners, we consider the interconnectedness of one financial area to another. Just as an orchardist may think about the rain from the Ocean and the eventual pie on the table as she looks at the apple on her tree, advisors at Trail Financial Planning think about how your taxes are impacted by your generosity, by your hopes for your future, and your connections to other people in the world.
If you would like to schedule time to talk about gifting or other financial matters, you can contact us here.
 – “Lastest Data Shows that the Tax Cuts and Jobs Act Did Not Dampen Charitable Giving,” Tax Foundation, June 22, 2020. https://taxfoundation.org/tax-cuts-jobs-act-affect-charitable-giving/