Since the Tax Cuts and Jobs Act (TCJA) was signed into law, fewer taxpayers itemize deductions, resulting in lower charitable deductions.
In 2020, however, more taxpayers may be able to deduct charitable donations as a result of provisions in the CARES Act.
Tax landscape for deductions
When the TCJA was signed into law in 2017, it created a new landscape for tax deductions. The law nearly doubled the standard deduction and reduced certain popular deductions such as state and local taxes. As a result, it was more advantageous for many taxpayers to opt for the standard deduction and abandon the idea of itemizing.
- It is estimated that 21 million fewer taxpayers itemize deductions on their returns following passage of the TCJA
- Regarding charitable contributions specifically, IRS data showed that roughly 14 million taxpayers claimed a charitable deduction (through itemizing) in 2018, down from 36 million taxpayers in 2017, as more filers opted for the standard deduction
- For 2020, the standard deduction is $12,400 ($24,800 for couples filing a joint return)
CARES Act made changes to charitable giving
The CARES Act made two changes related to charitable giving for 2020.
New $300 above-the-line deduction
- Taxpayers utilizing the standard deduction in 2020 can claim an above-the-line deduction of up to $300 of cash contributions to qualified charities (does not include donor-advised funds, supporting organizations, or private grant-making foundations)
- Taxpayers who are itemizing deductions can also claim this universal $300 above-the-line deduction
- Any cash contributions over $300 applied to this new deduction under the CARES Act may not be carried over to the following tax year
- The $300 amount applies regardless of filing status meaning that the same $300 limit applies to individuals as well as married couples. Couples filing a joint return cannot double the amount
- Because this is an “above the line” deduction, the deduction reduces the taxpayer’s adjusted gross income (AGI). Under the standard rules, a “normal” charitable deduction when itemizing only reduces taxable income
- For someone in the top tax bracket (37%), the deduction represents a tax savings of $111
Temporary increase in charitable deduction limit
For 2020, the limit on cash contributions to qualified public charities increases from 60% of AGI to 100% (does not include donor advised funds or private foundations). As a result, taxpayers who itemize may benefit from a larger charitable deduction as an overall percentage of their income. In the case of a significantly large, one-time charitable contribution, this provision may reduce the amount of the deduction that has to be carried forward to the next tax year.
Consider your financial plan
When considering changes to tax filings, it is important to consult with a financial professional or tax expert familiar with your financial plan. They can advise you on whether it could benefit your overall tax plan to take advantage of these provisions. As we approach the end of the year, it will be important to consider these deductions prior to the filing season. For more information on the CARES Act, read Putnam’s investor education piece, “Understanding the CARES Act and its implications for individuals and businesses.” Also for reference, read Putnam’s “2020 tax rates, schedules, and contribution limits.”
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