The amount of income tax you pay comes down to a relatively simple formula: add up all your taxable income and subtract the greater of certain allowable deductions (referred to as itemized deductions) or a standard deduction to arrive at your taxable income. The tax you owe is based on your taxable income minus any tax credits after calculating your income tax.
What is not so simple is understanding what constitutes taxable income, what deductions you can take, and what tax credits you are entitled to. That is why many people hire professional tax preparers to guide them through this process. A professional can ensure you report the right amount of taxable income and take advantage of the numerous tax breaks the tax code allows.
One such tax break, which only began for the tax year 2020, is the deduction for charitable donations, which can be subtracted from your taxable income even if you do not itemize your deductions.
Previously you only could take a deduction for an amount given to charity if you itemized your deductions. The only reason to itemize your deductions is if they exceed the standard deduction amount.
Up until 2018, approximately 30% of all filers could itemize their deductions and deduct charitable donations. *The IRS’s latest tax data shows only 13% of filers in 2019 itemized their deductions. Therefore, they were not able to take a tax donation for charitable giving. Charities were concerned that if fewer people could itemize, then the amount of donations could drop.
The CARES Act remedied this to a small extent by allowing a tax deduction for charitable donations up to $300 for taxpayers who did not itemize their deductions. The contribution must be a cash donation (as opposed to a gift of property) made directly to a qualified charitable organization to be eligible. Donations to a Donor Advised Fund do not qualify for this deduction. The $300 limit is for both single and married taxpayers. A recent tax law change remedied this by doubling the limit to $600 for married filers for tax years beginning in 2021. It is also important to note the deduction is not available for those taxpayers who will itemize their deductions since, presumably, the donations would be captured as part of their itemized deductions.
If you do not usually itemize your deductions, you should be aware of this new deduction opportunity and provide that information to your tax preparer. It is important to note the same rules for substantiation of the deduction apply to any charitable donation. Therefore, be sure to keep copies of the acknowledgment letters you receive from the charities in case you are audited.
Finally, if you live in New York or New Jersey, this new tax deduction is unfortunately not available to you. New Jersey does not allow deductions for charitable donations, and New York only allows charitable deductions if you itemize your deductions. If you have questions about this deduction or charitable planning in general, do not hesitate to contact an EKS advisor.
*SOI Tax Stats, irs.gov tax-stats-at-a-glance
