By: Chris J. Roe, CPA/PFS
As a physician, your are driven to help others. As Americans, we are driven to give back. In 2017 alone, we gave $410.02 billion in charitable donations - accounting for 2.1 percent of the GDP.1 With the 2020 holiday season officially upon us, it’s no surprise that our giving efforts will increase. If donating to charities is an integral component of your core values, it can also be an important, strategic play in lowering your tax obligation.
This year, charitable contributions can count even more toward lowering tax bills. Thanks to the CARES Act, which passed in late March 2020 amidst the coronavirus pandemic, your giving could stretch even further this tax season.
How Is This Year’s Charitable Contribution Exemption Different?
Thanks to the CARES Act, taxpayers are allowed to take a $300 above-the-line charitable giving deduction.2 This is significant because, typically, you have to itemize deductions in order to claim charitable donations on taxes.
Because of the CARES Act, this above-the-line deduction can be used for those taxpayers taking the standard deduction. As a reminder, the standard deduction for 2020 is $12,400 for single and married filing separately, $24,800 for married filing jointly and $18,650 for head of households.3
It’s important to note that the $300 limit is per filing unit, whether your filing single or jointly.
Who Does This Change Benefit?
This CARES Act exemption is not available for those who itemize their deductions, it’s only for those who are using the standard deduction on their 2020 tax returns.
This is significant because, historically, anyone taking a standard deduction has not been able to reduce their adjusted gross income (AGI) by claiming charitable contributions.
Nearly nine in 10 taxpayers now take the standard deduction and could potentially qualify for this new tax deduction. In tax-year 2018, the most recent year for which complete figures are available, more than 134 million taxpayers claimed the standard deduction, just over 87% of all filers, according to the IRS.
What Donations Count Toward the CARES Act Deduction?
Just as any other charitable contribution deducted from your taxes, eligible donations must be made to qualified 501(c)(3) organizations or any other qualified organization as outlined in section 170(c) of the Internal Revenue Code.2
What About Regular Charitable Contributions?
In the past, those who itemize their deductions were able to deduct up to 60 percent of their AGI in charitable contributions. Those who are extremely philanthropic may be interested to know that this limit has been raised to 100 percent for cash contributions.4
If you were so inclined to do so, you could donate all of your income and deduct 100 percent of it - leaving you with a $0 tax bill.
This relief benefit is more subtle than other aspects of the CARES Act. This change gives families and individuals an opportunity to lower their AGI without needing to itemize deductions and encourages us to be more charitably inclined this holiday season.
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