Charitable Contributions and the CARES Act

by | Jan 19, 2021 | Financial Planning

Charitable contributions can be a great thing for everyone involved. In 2017 alone, Americans gave $410.02 billion in charitable donations – accounting for 2.1% of the GDP. Making charitable donations can help fulfill your family’s moral values, but it can also play a significant part in lowering your taxable income.

If you donated to a charity in 2020, charitable contributions can count even more toward lowering tax bills for some. 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 Contributions Exemption Different?

Thanks to the CARES Act, filers will be allowed to take a $300 above-the-line charitable giving deduction. This means you do not need to itemize your taxes this year to use this deduction.  This is significant because following the tax law changes of 2017, most people took 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. 

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 have been made to qualified 501(c)(3) organizations or any other qualified organization as outlined in section 170(c) of the Internal Revenue Code.

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.

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.

While this deduction is just $300, it’s another form of tax relief for taxpayers in 2020.  After a year as chaotic as 2020, any little bit of relief helps, no matter how subtle.  You can still take the standard deduction and get a nice above-the-line deduction to your AGI.  If you have questions about your tax situation for 2020, now would be a great time to reach out to your financial planner or tax preparer.  If you don’t have professional assistance, we would be happy to speak with you!  Click here to schedule an initial call with our team today.  There is no cost or obligation!

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