What charitable deductions look like in 2021

Should I bother to keep a receipt for a charitable donation?

If you’re looking to owe less to the Internal Revenue Service (IRS), you may have considered making a charitable donation. Charitable donations create charitable deductions which dollar for dollar reduce your taxable income, not to be confused with tax credits.  And while you may have heard the old saying that, “Charity begins at home,” only donations to tax-exempt charities count. 

Since the Tax Cuts and Jobs Act (TCJA) increased the standard deduction in 2017, taking advantage of charitable deductions has significantly dropped off. In fact, it’s currently only available to the 10% of American taxpayers who itemize their tax returns. Itemizing taxpayers can sum up certain big-ticket expenses, such as mortgage interest, property taxes (up to $10,000), and exceptionally high medical expenses, and then subtract that money from their taxable income rather than simply taking the standard deduction. 

So how is this beneficial to someone itemizing?

Example: Tara, an attorney, pays a 32% marginal tax rate on her $200,000 income as a single filer. Because she itemizes, her $1,000 annual donation to a favorite animal shelter (with receipt as evidence) costs her $680 after taxes. The rest is covered by the tax break. Compare this to Claire, a retiree taking the standard deduction ($12,550 in 2021 for single taxpayers) has no need to report her donation on her tax return, and therefore needs no receipt. So while the standard deduction typically pans out to be a good deal for taxpayers (plus reduces the hassle of saving receipts to itemize), it doesn’t change the fact that giving $1,000 costs $1,000.

How did Coronavirus change things?

You likely remember, and hopefully benefited, from The CARES Act being passed in response to the COVID Pandemic. This temporary legislation baked in a charitable incentive to those taking the standard deduction to promote giving during such a difficult time. Even though the economy is on the rebound with businesses reopening, the incentive has been extended and enhanced for 2021.

The CARES Act allowed for an additional, “above-the-line” deduction in 2020 for charitable gifts made in cash of up to $300. It was unclear, at first, if the $300 was per person or per filing – but it was later clarified to be per filing. This meant that our retiree, Claire, did not receive any tax breaks in 2018 and 2019, but she can deduct $300 of her $1,000 donation in 2020 and 2021 if she keeps the receipt. Years 2022 – 2025 remain to be seen, and the Tax Cut and Jobs Act is set to expire in 2025, which may mean a revision back to lower standard deduction. 

In 2021, not only has this above-the-line deduction been extended, but can be utilized per person. This means joint filers taking the standard deduction can claim up to $600 in charitable deductions. Keep in mind that this deduction is for cash contributions to a qualified charity. Clients have inquired whether the deduction can be taken for contributions made to “Donor Advised Funds,” but unfortunately it doesn’t apply in that scenario.